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PRICE FIXING IN THE UNITED STATES 
DURING THE WAR 



BY 

LEWIS H. HANEY 



REPRINTED FROM POLITICAL SCIENCE QUARTERLY 
Vol. XXXIV, Nos. i, 2 and 3, March, June and September, 1919 



NEW YORK 

PUBLISHED BY THE 

ACADEMY OF POLITICAL SCIENCE 

1919 



Gift 

Atitlior 

DEC 1 /Sll 






PRICE FIXING IN THE UNITED STATES DURING 
THE WAR 

I 

IN discussing price fixing it is necessary to define the subject, 
since there are various methods of controlling prices, some 
of them far removed from the popular notion of what is in- 
volved in the operation. As used in this and a subsequent article, 
the term " price fixing" includes any regulation of price effected 
directly or indirectly by government agency. More specifically, 
the discussion will be confined to the control of prices in which 
some agency of the government having power to enforce its 
decision, determines, or sanctions the determination of, a price 
by some process other than that of free bargain between buyer 
and seller. This definition is intended to cover both price 
agreements made between buyer and seller with the sanction of 
a government agency and prices established by some branch of 
government for its own requirements. In the latter case the 
arrangement would commonly be in the nature of an ordinary 
contract between buyer and seller ; but when the purchase is 
made with a threat to commandeer, and the price is named by 
the branch of government directly or indirectly concerned, that 
price may be said to be fixed. 

Such a definition gives a broad scope to the field of the in- 
quiry. It will be admitted by all who are conversant with the 
facts that the whole history of price fixing in the United States 
during the period of the war will never be known. The price- 
fixing agencies were in fact so numerous, and the arrangements 
made were so often informal, that an exhaustive treatment of 
the subject would be well-nigh impossible. Moreover, many 
prices were controlled indirectly, and when this control was to 
any degree intentional, the result may be properly termed a 
fixed price. Nevertheless, material is available for a study of 
a great part of the price-fixing activities of the government, 
and even where such is not the case, the writer's first-hand 
knowledge enables him to speak with some authority concerning 
methods and results. 

. 3 



4 



POLITICAL SCIENCE QUARTERLY 



In this article price fixing in the United States during the war 
will be discussed under three general heads : ( i ) scope and 
period; (2) agencies and their powers; (3) methods. The 
subject will be continued in a subsequent paper which will con- 
sider the purposes and results of the policy and undertake a 
critical appraisal of it. 

I . Scope and Period 

In what follows, attention will be confined chiefly to the for- 
mal price fixing which was carried on by such agencies of the 
government as the War Industries Board and the Food and Fuel 
Administrations. Prices were more or less formally fixed by 
various departments or branches of the United States Govern- 
ment for at least no important products, each of which re- 
quired a separate price-fixing operation.^ This was exclusive of 

' The following is a partial list of products for which prices were fixed by some 
government agency or sanction. They are arranged with some idea of the order in 
which the prices were fixed, although no pretense to accuracy in this regard is claimed > 



Coal, bituminous. 

Coal, semi -bituminous. 

Coal, anthracite. 

Coke. 

Copper, ingot, electrolytic. 

Copper wire. 

Iron ore. 

Pig iron. 

Steel plates. 

Steel structural. 

Wheat. 

Ship timbers. 

Pine, yellow. 

Steel billets. 

Sugar. 

Sardines. 

Bar iron. 

Pipe, cast iron. 

Steel rails. 

Nickel. 

Tin plate. 

Wire, barbed, galvanized. 

Wire, plain, annealed. 

Ammonia. 

Douglas fir. 



Ammonium sulphate. 

Alcohol, wood. 

Acetic acid. 

Nitrate of soda. 

Zinc, grade "A." 

Zinc, sheets and plates. 

Binder twine. 

Castor beans. 

Castor oil. 

Aluminum. 

Molasses (imported.) 

Manila fibre. 

Retail lumber (eastern cities.) 

Platinum. 

Hemlock. 

Pine, white. 

Spruce, eastern. 

Paper, newsprint. 

Manganese ore. 

Sashes and doors. 

Linters (munition.) 

Quebracho extract. 

Cement, Portland. 

Sulphur. 

Hides. 



PRICE FIXING DURING THE WAR 5 

repetitions or renewals at later periods which often involved as 
much work and study as the original decisions. More than 
30 of the products, however, were duplications in the sense that 
they represented merely different grades of some of the other 
eighty or more commodities, e. g., the different grades of wheat 
and iron. 

Metals and metal products furnished the widest field for price 
fixing. The Price Section of the War Industries Board reports 
nineteen metals and metal products under the head of " con- 
trolled commodities." Several cases of price fixing in the 
metals group were not covered by this report, but, on the other 
hand, the figures of the War Industries Board include separate 
enumeration of the various grades of pig iron and steel products, 
and the additions and subtractions to be made seem to balance 
one another, leaving the number of metal price fixings approxi- 
mately as reported. The other groups of commodities which 
appeared most frequently in price fixing were cloths and cloth- 
ing, building materials, including lumber, foods, farm products, 
drugs and chemicals and fuels. Prices were fixed for all the 
chief basic materials of industry, except petroleum and raw 

Note — Continued : 

Rubber, . Flour, wheat. 

Wool. Rice. 

Acetate of lime. Building tile. 

Quicksilver. Crushed stone. 

Iridium. Sand and gravel 

Hogs. Lead. 

Leather, harness. Charcoal. 

Prunes, California. Leather, sole. 

Raisins, California. Glycerine, (dynamite.) 

Sulphuric acid. Cottonseed meal. 

Nitric acid. Cottonseed oil. 

Cotton linters. Wool grease. 

Cotton goods. Burlap. 

Cotton yarns. Tin, pig. 

Denims, Mass. Tree nails. 

Drillings, Mass. Locust. 

Ginghams, Amoskeag. Cotton compress rates. 

Print cloths. Birch logs. 

Sheetings, bleached. Brick, common. 

Sheetings, brown. Wallboard. 

Hemp. Food products (canned vegetables etc.^ 

Tickings, Amoskeag. 



6 POLITICAL SCIENCE QUARTERLY 

cotton, and also for a group of the more important manufac- 
tured products. 

In general, it may be said that prices were fixed for three 
chief classes of commodities : ( i ) basic raw materials and 
fuels, such as iron ore, copper, lumber, sulphuric acid and 
coal; (2) munitions of war, such as sulphuric acid, grade "A" 
zinc, platinum and cotton linters ; (3) general consumption 
necessaries, such as coal, sugar, flour and raisins. The basic 
raw materials and fuel affect all classes of commodities, includ- 
ing munitions and direct consumption goods; and the consump- 
tion necessaries are also essential to the maintenance of an 
army. Nevertheless, each of the three classes has its separate 
significance, and the classification throws light on the purposes 
of price fixing. The prices that were first formally fixed by 
the government fall chiefly in the basic raw materials group. A 
more shortsighted policy might have begun by regulating prices 
of articles required by the army and the navy and those which 
figure most conspicuously in public consumption. 

While in most cases it was the price of a unit of commodity 
that was fixed, in others it was the rate to be charged for a 
service. For example, in the latter part of 191 8, at the request 
of the Railroad Administration, the War Industries Board fixed 
the rate for cotton compressing. This rate has been virtually 
part of the railway rate, cotton often being compressed in 
transit. In such cases, the price is like a " rate," in that it is 
not based on specific cost, and is a charge made for a service 
rendered in necessary connection with the plant. Similarly the 
margins of cotton ginners and retail lumber yards were regu- 
lated, and in the latter case charges for milling and delivery 
were segregated. As is well known, the charges of various 
middlemen and dealers in food and coal were fixed. 

An examination of the list of commodities whose prices were 
fixed shows that articles which may be classed as exclusively 
luxuries, are not included. Some of those listed, as, for ex- 
ample, platinum, raisins, leather and alcohol, may be subject to 
luxurious consumption ; but in price fixing they were not re- 
garded as falling within the category of luxuries. 

It is of some interest, moreover, to note that in several in- 



PRICE FIXING DURING THE WAR y 

stances the commodity listed was either locah'zed in production 
or centralized in control, notably in the cases of aluminum, 
nickel, anthracite coal and copper. In others, however, neither 
condition existed, as in the case of lumber, wheat, hollow build- 
ing tile and canned foods. 

The fraction of the total market for a given commodity 
affected by a price-fixing order varied widely, ranging from 
a relatively small part represented by purchases by a single de- 
partment of the government to practically the entire world 
market. In some cases, prices were fixed for the United States 
Government alone, e. g., nickel, quicksilver, sulphuric acid, 
cement, New England spruce and other lumber. In others 
the prices were fixed for the government and made available 
to the public in a contingent way, as, for example, in the 
case of hemlock lumber, where it was provided that any 
quantity of the commodity which, in the judgment of the 
lumber director of the War Industries Board, could be re- 
leased for the commercial market, might be sold to the 
public, subject to the maximum price fixed for the govern- 
ment. In still other cases, purchases by the allied governments, 
for example, copper and raw sugar, were included in the scope 
of price fixing for the United States Government ; and in still 
others, the railways of the United States were specifically men- 
tioned, even when the price did not apply to the public. 
Prices were sometimes fixed for single branches of the govern- 
ment, as in the case of oil products for the navy and cow-hide 
splits for the quartermaster's corps of the army. Prices were 
even fixed by the United States Government to apply to pur- 
chases by the allied governments only, as was the case with 
fuel oil, gasoline and kerosene. 

The President, however, early took a firm stand for the prin- 
ciple that prices charged by producers to the public and to 
the government should be uniform, and, with the exception of 
prices on certain purchases made by government departments, 
rapid progress was made during 191 8 toward carrying out this 
poHcy. Thus the prices on pine, fir lumber and cement, which 
at first applied only to direct government purchases, were ex- 
tended to the public. Political motives coupled with a legitimate 



8 POLITICAL SCIENCE QUARTERLY 

desire to allay social unrest doubtless played a part in this 
extension. Aside from such motives, however, it proved to be 
highly important as a practical matter that prices under similar 
conditions of purchase should be the same to all. The exist- 
ence in the commercial market of prices that were higher than 
those paid for government purchases made it difficult for the 
government to secure prompt deliveries. Moreover, such a 
situation often defeated the purpose of price fixing, for the 
reason that large purchases might be made by private concerns 
which were producing more or less directly for the government. 
Naturally, it was found much simpler to fix prices for govern- 
ment purchases only ; and such a limited policy was preferred 
by several important industries, partly, no doubt, because they 
were thus enabled to reap large profits on sales in the com- 
mercial market. In cases where the price-fixing policy was 
extended to the public, it was sometimes found necessary 
to increase prices. The whole situation in this respect was 
specially complicated when the government purchases were con- 
fined to certain grades of a group of products which were pro- 
duced jointly with other grades that were purchased largely 
by the public. In such cases, the government price might be,, 
and sometimes was, fixed on a relatively low level, and the price 
to the public for joint products put high enough to allow the 
producer a large profit. 

When the government took all, or almost all, of a given pro- 
duct, the price fixed was, of course, practically for the govern- 
ment only, whether it was so stated or not. But companies 
were often averse to making specially low prices to the govern- 
ment, on the ground that such prices would cause dissatisfac- 
tion in their trade. 

The period of price fixing began about the middle of 1917. 
and came to a nearly complete standstill with the signing of the 
armistice. Among the earliest commodities to be affected by 
the price-fixing activities of the government were coal, wheat, 
lumber, sugar and canned foods. Lumber prices for the gov- 
ernment alone were fixed by arrangement with the Council of 
National Defense on June 18, 1917, and approved by the Sec- 
retary of War; coal prices for the navy were fixed on June 19, 



PRICE FIXING DURING THE WAR g 

191 7. The Lever Act of August 10, 191 7, set a minimum 
price on the wheat crop of 191 8. Bituminous coal prices at 
the mine were fixed by executive order on August 2i, 191 7. 
Nine days later came the President's announcement of a $2.20 
basic price on wheat " to be paid in government purchases." 
The price of copper was fixed in September. 

Immediately upon the signing of the armistice, the War In- 
dustries Board began to make preparations for disbanding, 
although it was arranged that the Price Fixing Committee 
should continue a rather nominal existence until March i, 19 19. 
Relatively few prices have been fixed since November, 191 8, 
although those fixed prior to that time extended well over into 
1919. Prices, as fixed, were allowed to expire in spite of the 
fact that in several important cases the representatives of the 
industry concerned asked that the existing price be continued. 
On December 11, 191 8, the War Industries Board issued a 
statement to the effect that since it would cease to func- 
tion after January i, 19 19, no new price agreements would be 
entered into by the Price Fixing Committee, and that all prices 
theretofore fixed would be allowed to expire by limitation. 
Several commodities, the costs of which had not been immedi- 
ately ascertainable, had been consumed in large quantities by 
the government at prices subject to later determination. For 
example, during the latter part of January and the early part of 
February, 1919, the Price Fixing Committee of the War Indus- 
tries Board fixed prices on common brick and on wall board. 
Inasmuch as the Food and Fuel Administrations depend for 
their powers upon the Act of August lO, which applies " during 
the war," they have continued to function down to this date 
(January 23). 

2. Agencies and Their Powers 

Of the various agencies through which prices were fixed 
the following are without doubt the more important : the Con- 
gress of the United States which by direct legislation fixed a min- 
imum price on wheat; the President of the United States, acting 
under authority granted by Congress, who fixed prices for coal 
and wheat; the War Industries Board, created by the Presi- 



10 POLITICAL SCIENCE QUARTERLY 

dent under authority from Congress, which, through its Price 
Fixing Committee, fixed numerous prices from September, 
1917, through November, 1918; ' the United States Food Ad- 
ministration which fixed prices of hogs, meat, flour, sugar, binder 
twine etc.; local food administrators and sub-agencies, such as 
the Sugar Equalization Board and the United States Food Ad- 
ministration Grain Corporation which fixed many prices ; 
the United States Fuel Administration which fixed prices of 
coal, coke etc.; the War Trade Board which fixed prices of 
rubber, quebracho extract and manila fibre ; the Federal Trade 
Commission which fixed the price of newsprint paper; the 
Emergency Fleet Corporation of the United States Shipping 
Board which fixed the price of ship timbers and locust tree 
nails ; the United States Shipping Board which fixed ocean 
freight rates ; the International Nitrate Executive Committee 
which fixed the price of nitrate of soda ; the Food Purchase 
Board which fixed prices on canned foods etc., for the army 
and navy ; various army and navy departments which fixed 
prices of gasoline and fuel oil, zinc oxide, automatic sprinklers, 
sashes and doors, castor oil etc.; the Appraisal Boards of the 
army and navy which fixed prices in cases of dissent from 
prices named in commandeer orders ; and the United States 
Railroad Administration which took steps to fix reasonable 
prices on locomotives and cars. 

The War Industries Board dealt with prices through its 
Price Fixing Committee, which consisted of a chairman, ap- 
pointed by the President, and representatives of the army, the 
navy, the Federal Trade Commission, the Department of Labor 
and the Tariff Commission. The Fuel Administrator occasion- 
ally sat with the committee as actually constituted. The Inter- 
national Nitrate Executive Committee, on which the United 
States was represented, sat in London and determined a uniform 
monthly price to be paid to importers of nitrate of soda into 
the allied nations, and a sub-committee in New York, on which 
there was a representative of the War Industries Board, super- 

'In January and February, 1919, several cases of price fixing for commodities 
bought at tentative prices were pending cost determination. 



PRICE FIXING DURING THE WAR n 

vised the distribution of the product within the United States. 
The Food Purchase Board was created to centrahze purchasing 
for the army and the navy and consisted of representatives of 
the army, the navy, the Federal Trade Commission and the 
Food Administration. 

In addition to the foregoing agencies, it is to be noted that 
in granting Hcenses to use enemy-owned or controlled patents, 
the Federal Trade Commission reserved the right to fix prices 
on the articles manufactured. The Department of Agriculture 
has also functioned materially in connection with prices fixed 
for certain commodities. For example, in determining the 
basic price of hogs, the agreement was made by a committee 
composed of representatives of the Food Administration, the 
Department of Agriculture and representatives of the industry. 
The Department of Agriculture has also functioned in connec- 
tion with the sale of nitrates to the farmers, purchasing nitrate 
of soda and selling it " at cost." 

It can hardly be said, however, that this department actually 
fixed any price. As time went on, a tendency toward greater 
uniformity and centralization of procedure developed within 
the price-fixing mechanism. This tendency is to be discerned 
in the increasing amount of work thrown upon the War Indus- 
tries Board and the Federal Trade Commission, the former 
naming a price based largely upon the cost findings of the 
latter. For example, toward the end of 191 8, the division of 
the army which dealt with aeroplanes brought before the War 
Industries Board the question of determining a price on 
mahogany for aeroplane propellers, and on birch for aero- 
plane bodies. The signing of the armistice prevented action 
by the board, except in the case of birch logs. Other illustra- 
tions of the tendency appear from the fact that the War Indus- 
tries Board fixed the price of locust tree nails for the Shipping 
Board and the rate for compressing cotton for the Railroad 
Administration. It would be incorrect, however, to give the 
impression that centralization and uniformity in price fixing be- 
came the rule ; in the writer's opinion, the tendency referred to 
was most effective when the branch of the government making 
the purchase ran into difficulties. 



12 POLITICAL SCIENCE QUARTERLY 

Within the War Industries Board there was what may be 
called a hierarchy in price fixing. With few exceptions, each 
case passed through a preliminary stage in the hands of the 
chief of that division of the War Industries Board which was 
concerned with the commodity in question, and he conducted 
preliminary negotiations with representatives of the industry. 
In some cases, his findings were carefully reviewed by the Price 
Fixing Committee, while in others this did not seem necessary^ 
and the division chief virtually named the price. As will be 
noted, in some of the less important price-fixing arrangements, 
the Price Fixing Committee announced the price without the 
formal sanction of the President; and in a few cases, at least, 
it delegated price fixing to a sub-committee. 

In initiating price fixing no systematic plan was followed and 
prices were at first fixed sporadically. Various governmental 
powers were resorted to and were applied by numerous agencies 
using diverse means for carrying out the decisions or agree- 
ments which they reached. In some cases, prices were fixed 
under special authority, conveyed directly by act of Congress^ 
and limited by the provision of such act to specified commodi- 
ties. Thus by Section 14 of the Act of Congress of August 10, 
191 7, already referred to, the President was empowered to fix 
" a reasonable guaranteed price for wheat." Accordingly on 
August 30, the President, acting upon the recommendation of a 
committee appointed by himself, promulgated a price of $2.20- 
per bushel for no. i northern spring wheat at Chicago. 

The same law, commonly known as the Lever Act, authorized 
and empowered the President to license importers, producers, or 
distributors of " any necessaries, in order to carry into effect any 
of the purposes of this act; " and if he found unreasonable any 
storage charges, commissions, or profits, to revoke licenses 
and make findings as to reasonable profits etc. Section 10 of 
the act authorized him to requisition necessary foods, feeds,^ 
fuels and other supplies. Section 1 1 gave him power to pur- 
chase and sell at reasonable cash prices wheat, flour, meal, 
beans and potatoes. 

The power under this act ran to the President, and the Fuel 
Administrator and Food Administrator acted under " executive 



PRICE FIXING DURING THE WAR 13 

orders." Thus an order of the Fuel Administration begins as 
follows : 

The United States Fuel Administrator, acting under authority of an 
Executive Order of the President of the United States, dated August 
23, 1917, appointing said Administrator, and of subsequent orders, 
and in furtherance of the purposes of said orders and of the Act of 
Congress therein referred to and approved August 10, 191 7, hereby 
orders and directs. 

On the other hand, the War Industries Board acted under 
less specific authority proceeding from the general war powers 
of the President. Thus, the prices fixed on steel, copper, 
lumber, and other commodities by the Price Fixing Committee 
of the War Industries Board were in theory approved by the 
President before being publicly announced. In some cases, 
however, such as retail lumber prices in certain eastern cities, 
the prices were announced without formal approval by the 
President. 

The means of enforcing prices when " fixed," whether de- 
termined by the price-fixing agencies or reached by agreement 
with the producers, were various, ranging from appeals to 
the patriotism of the trade to commandeering orders. In most 
cases, there was in the background the possibility of the 
government's taking over the industry; and in not a few, the 
army or navy commandeered plants or stocks of merchan- 
dise. In such cases, a price was named which was subject 
to adjudication, first by the Board of Appraisers and then, 
upon appeal, by the courts. On December 24, 191 7, all wood 
chemicals (acetic acid, alcohol eic.) were commandeered for a 
period of six months and later the commandeering order was 
extended to cover the second half of 1918. In connection with 
this extension, the following notice was given : " The same 
prices as above are awarded by the Board of Appraisers, but 
dissent has been made by several of the manufacturers, and an 
investigation is now being made by the Federal Trade Commis- 
sion as to the advisability of changing this award." In this 
case, therefore, the prices of commandeered articles, after being 
approved by the Board of Appraisers, were made tentative, sub- 
ject to adjustment on the basis of subsequent cost findings. 



14 POLITICAL SCIENCE QUARTERLY 

Apart from purchases on army or navy account, however, 
price fixing was effected chiefly by " licenses " and control of 
" priorities." The Food Administration and the Fuel Adminis- 
tration, under the Act of August lo, 191 7, put in force extensive 
systems of licensing, under which unlicensed producers and dis- 
tributors were not allowed to engage in business, and licenses 
were revoked, if the regulations of the administrations were 
disobeyed. The War Trade Board also licensed importers of 
certain articles on condition that the prices which it fixed should 
be observed. 

The administration of priorities proved to be a major element 
in the price-fixing program, and involved so many important 
questions that it would take an article of the length of the 
present paper to do the subject justice. Toward the end of 
191 7, a priorities division was established within the War In- 
dustries Board and a priorities commissioner placed at its head. 
Representatives of the Fuel Administration, the Railroad Ad- 
ministration and the United States Shipping Board were placed 
upon the committee. The War Trade Board, the Food Admin- 
istration, and the army and navy were also represented. The 
Price Fixing Committee of the War Industries Board and the 
Priorities Committee worked in harmony. This was of the ut- 
most importance, as it made possible a substantial degree of 
unity of policy among the different government purchasing de- 
partments; and through the power of the Priorities Committee 
over fuel and transportation pressure could be brought to bear 
upon a recalcitrant business concern for the purpose of com- 
pelling it to adhere to fixed prices. The Priorities Committee 
undertook whenever necessary to administer priorities in the pro- 
duction of all raw materials and finished products, save food, 
feeds and fuels. The distribution of fuel was, of course, under 
the supervision of the Fuel Administrator, and transportation 
service under the United States Railroad Administration, but 
the Fuel and Railroad Administrators were guided largely by 
the "preference list" issued by the Priorities Committee and 
by the recommendations of the division chiefs of the War In- 
dustries Board, and on the whole came to work in close relation 
to the general policy for which the committee stood. To sum 



PRICE FIXING DURING THE WAR 15 

up, the Priorities Committee exercised a general function of 
adjusting production to the needs of the nation at war by allo- 
cating the limited supplies of fuel and basic raw materials, and 
its powers were sometimes used as a club to reinforce the 
authority of the Price Fixing Committee in particular cases. 

This phase of the matter is so important that a concrete illus- 
tration is worth while. During 19 18, it was decided that the 
production of the cement industry should be reduced and the 
amount of the reduction was placed at 25 per cent of the aver- 
age shipments for the three preceding years. The Director of 
the Building Materials Division of the War Industries Board was 
the person immediately responsible for making these arrange- 
ments. On his approval the Fuel Administration applied the 
cut by limiting the quantity of fuel. As coal is an unusually 
large factor in the manufacture of cement, this was very effect- 
ive. It should be noted that the Fuel Administration in such 
cases had nothing to do with deciding as to the priority, but 
that the matter rested with the War Industries Board. 

The Army and Navy Appraisal Boards were called in to pass 
on prices in the case of commandeer orders issued for the re- 
quirements of those departments. When a commandeer order 
was to be issued, the practice developed of having the chief in 
charge of that division of the War Industries Board which dealt 
with that commodity approve the order in which the price was 
named. If, as was frequently the case, the companies produ- 
cing the commodity were not satisfied with the price, the matter 
was brought before the Appraisal Board and a hearing was 
given. At this hearing, the representative of the War Industries 
Board testified, and, in some cases, costs secured by the Federal 
Trade Commission were presented in evidence. Appeal might 
be taken from the Appraisal Board to a superior board, and 
thence to the courts. 

It is important to observe that members of both the Army 
and Navy Appraisal Boards sat on the Price Fixing Committee 
of the War Industries Board. To put the matter in another 
way, those members of the Price Fixing Committee who repre- 
sented the army and navy were also members of the appraisal 
boards of these two departments, 



1 6 POLITICAL SCIENCE QUARTERLY 

It is apparent, therefore, that as finally worked out, the price- 
fixing machinery of the various government departments was 
nicely coordinated through a system of interlocking representa- 
tion on the Price Fixing Committee, the Appraisal Boards and 
the Priorities Committee. Furthermore, the Fuel and Railroad 
Administrations were included in the community of interest. 

Both by the War Industries Board and by other agencies, 
price fixing was often conducted under the guise of voluntary 
agreement. In the case of munition linters, the price-fixing 
announcement even goes so far as to say : 

It must be understood that the prices named are not obligatory or 
by authority of the War Industries Board, but are, in the opinion of 
the representatives of the United States Bureau of Markets and the 
Cotton and Cotton Producing Section of the War Industries Board act- 
ing as a Committee, fair and just prices that should be paid. 

The announcement goes on to state, however, that in the event 
of failure to agree, the Ordnance Department may commandeer 
the linters, thus giving to the owners the opportunity to estab- 
lish the actual value. 

In some instances the government enjoyed a buyer's monop- 
oly. When such was the case it could fix the price at any point 
which, in the producer's mind, would be high enough to be 
better than no price. 

It goes without saying that no discussion of the power to fix 
prices would be complete without a reference to the part played 
by patriotism. While there can be no doubt that in the minds 
of business men in general, profits stimulated patriotism, yet a 
feeling of loyalty to the nation, or some substitute therefor, made 
possible much that would be difficult or impossible in times of 
peace. Publicity was made more effective ; and not infrequently 
complaints and information came to the War Industries Board 
and other branches of government from patriotic third parties. 
The patriotism of possible purchasers helped to defeat the 
activities of such producers as were willing to sell their products 
to commercial buyers at higher prices than those fixed. Patriot- 
ism also secured a cooperation and service on the part of the 



PRICE FIXING DURING THE WAR ly 

various industries that were essential to the success of the price- 
fixing program. 

As already indicated, the progressive unification of govern- 
ment activities which took place during the war contributed to 
the effectiveness of the program. In the earlier days of the war, 
when the army and navy, the Shipping Board and other depart- 
ments and agencies were bidding against one another on the 
markets, it was extremely difficult to secure price-fixing results. 

Much might be written concerning the different degrees of 
compulsion that were used in connection with the different agen- 
cies and their powers. Suffice it to say that the compulsion 
used ranged all the way from actual commandeer orders through 
the revocation of licenses by Fuel and Food Administrations 
down to a bare and sometimes informal sanction of agreements 
entered into voluntarily between private parties. 

3. Methods 

In the United States there was little background or precedent 
for a program of price fixing. The Navy Department had a 
notably efficient organization tor purchasing what it required at 
reasonable prices, and the army had a similar organization. 
But to deal with the broader problems involved in regulating 
prices to the public and to the government as a whole, there 
was no established political machinery or policy. As the scope 
of price fixing was extended, the methods were naturally some- 
what improved ; but it is unfortunate that there were not defi- 
nitely formulated at the outset some general principles which 
could have been consistently applied by such agencies as the War 
Industries Board. As usual in this country, we went ahead in a 
hand-to-mouth fashion, building up prece'dents as we went. On 
the whole, it may be said that no definite policy was ever 
established with regard to the essential bases of price fixing. 

Various methods were tried. In the first place, prices were 
fixed both directly and indirectly. As a rule, each commodity, 
the price of which it was desired to fix, was taken up directly 
and a specific price made for its purchase ; but in some cases 
reliance was placed upon indirect control of the price of one 
commodity through direct control of the price of another. For 



1 8 POLITICAL SCIENCE QUARTERLY 

example, the cases of glycerine and zinc spelter may be cited. 
The price of dynamite glycerine was specifically fixed, and in 
connection therewith it was recognized that the price of crude 
glycerine would be controlled. " It is assumed," runs the order 
which fixed the price of the former, " that the price of crude 
glycerine may be stabilized by market conditions to a basis con- 
forming to the prices specified for dynamite glycerine." In con- 
nection with the price of grade " A " zinc which was specifically 
fixed, it was known that the price of common spelter would be 
held below a certain maximum. Since purchasers prefer high- 
grade spelter, they would have demanded it, had the price of 
common spelter advanced to a point near the price of grade 
" A ". The cost of redistilling common spelter for the purpose 
of producing grade " A " zinc was approximately three cents 
per pound. The producers preferred to sell common spelter at 
about nine cents per pound when the price of grade " A" zinc 
was fixed at twelve cents per pound. As the demand for high- 
grade zinc was great and the demand for common spelter was 
comparatively small, the producers of spelter were induced to 
redistill as much as possible. 

In discussing the subject of indirect price fixing it should be 
remarked that the Administration hoped that by fixing the 
prices of such commodities as coal, iron, copper and lumber the 
whole price structure would be affected. While it is probable 
that a considerable part of the reduction in the price of such 
materials went to increase the profits of those engaged in later 
stages of production and in the distribution of finished products, 
nevertheless, it is undoubtedly true that to some extent these 
hopes were realized. Who can say what the prices of many 
finished commodities entering into the daily consumption of the 
average man would have been, if the prices of coal and iron 
had not been held in check? And is it not probable that if the 
prices of hides and leather and cotton had been effectively fixed 
in 191 7, the prices paid by the consumers for shoes and shirts 
would have remained at more reasonable levels? 

A most interesting and important phase of the government's 
indirect price-fixing activities lies in the attempts made to re- 
strain or maintain prices by controlling demand. It is to be 



PRICE FIXING DURING THE WAR 1 9 

hoped that a special study will be made of these attempts. The 
efforts to reduce the consumption of tin, platinum, coal, sugar, 
wheat and meat were notable. These efforts culminated in 
rationing (sugar) and the requirement of purchases of substi- 
tutes (wheat). The restriction of demand was supplemented 
by' steps to prevent waste and to improve methods of produc- 
tion, e. g., cleaner threshing of wheat. Most of these " con- 
servation " measures are to be approved without reserve. 

Closely connected with the conservation phase as seen in con- 
trol of demand, rationing etc., were " stabilization" and pooling. 
But pooling, while partly used to facilitate rationing (as in 
the case of sugar), may also be used to keep prices up, either 
locally or throughout the entire market. In at least three 
cases, wheat, sugar and tin, the government entered upon 
a pooling program for the purpose of stabilizing prices. 
Stabilization is a term which implies mixed motives, a con- 
siderable part of the object commonly being to maintain or 
keep up prices, — at least in a part of the field. This was 
the case with the Sugar Equalization Board and the tin 
pool, to say nothing of the government's grain corporation. 
It is doubtful, however, if government monopoly of supply 
has proved desirable. 

The degree of precision with which prices were fixed varied 
widely from commodity to commodity, ranging from a loosely 
determined maximum price to a careful determination of the 
definite price to be charged for a particular commodity on a 
particular purchase. As a rule, only maximum prices were 
fixed, although in a majority of cases the price named as 
a maximum was the one which actually prevailed. This 
apparently was not infrequently taken for granted by the price- 
fixing agency ; and it was not until the price-fixing program 
had been considerably developed that the significance of the 
word "maximum" came to be realized. This was natural 
during a period of rapidly advancing costs, especially in 
view of the fact that the price was ordinarily fixed on the 
basis of costs ascertained for a period that had already ex- 
pired. In important cases, however, the actual market price 
fell below the maximum named by the government. This. 



20 POLITICAL SCIENCE QUARTERLY 

was true of zinc plates and sheets and certain kinds of 
lumber. Also in the case of rubber, a price was named by the 
War Trade Board as a maximum, which was considerably higher 
than the market price. These cases are all easily explained. 
The raw material for zinc sheets probably existed in over supply 
and was abundant and cheap ; the lumber-production capacity 
was in excess of demand, and in particular cases competition of 
cheaper lumber prevented other kinds from getting a price 
which was equal to the cost of production. In fixing the price 
of rubber, the War Trade Board had in mind merely a general 
limit upon the possible effects of speculation and hoarding on 
the future market, while the large production by rubber planta- 
tions and competition kept prices down. Toward the end of 
the war a number of commodities fell somewhat below the ex- 
isting maximum price. 

As already noted, a minimum price was fixed for wheat, the 
reason being that it was desired to guarantee the market in this 
case and thus encourage production. The price of hogs was 
also fixed on a positive minimum basis after the attempt to 
maintain the price on the basis of a fixed ratio to corn had 
failed. Wheat also furnishes a case in which both a maximum 
and a minimum price were specifically fixed.' 

The fixing of the exact price which it was intended should 
prevail in the market was ordinarily resorted to in the case of 
purchases by departments of the government. These included 
a considerable part of those commodities which may be classed 
as munitions of war, such as nickel, quicksilver and castor 
beans, the last needed for the manufacture of castor oil to be 
used as an aeroplane-motor lubricant. 

The extent of the producing territory covered by a fixed 
price is a matter of some importance in a discussion of the pre- 
cision of price fixing. When the price of a widely produced 
commodity was fixed for the whole country, wide differentials 
of profit were the result; when the country was divided into 
districts or territories, for each of which a different price was 
fixed, the price could be made to conform more closely to the 

* See above, pp. 9, 12. 



PRICE FIXING DURING THE WAR 21 

different costs which naturally prevail in different parts of the 
country. This distinction is well illustrated by the problems 
which the Fuel Administration met in fixing the price of coal. 
Much of the criticism of the early price fixing for this com- 
modity arose out of the attempt to apply a single price over 
large areas within which the costs of production varied widely; 
and as the cost findings of the Federal Trade Commission be- 
came more numerous and detailed, prices were fixed on a finer 
and fairer scale. 

In fixing the price of a number of commodities, such as 
lumber and leather, it is practically necessary first to fix an 
average base price on the material from which several grades 
of product are secured. This is one of the difficulties attending 
the control of prices of commodities which are produced under 
the condition which economists call " joint cost." Clearly when 
the Price Fixing Committee merely determined that a fair, 
maximum, average price for mill-run lumber was $28.00 per 
thousand board feet, the price to be charged for " B and better " 
flooring, or No. 3 common boards, remained indefinite and un- 
certain. Moreover, the percentage of the different grades of 
lumber secured from the log differs among the different saw- 
mills, so that even though the base price might be satisfactorily 
allocated among the several grades, hardly any two mills would 
secure the same average result. 

Finally, no discussion of the degree of precision attempted 
in fixing prices would be complete without reference to the 
method of fixing the margins of producers' profits, which was 
so much in use by the Food Administration. Obviously a re- 
sult similar to that obtained by naming a price may be gained 
by limiting profits. Thus, an effort was made to restrict the 
profits of the meat packers to 2)^ per cent on sales, and in the 
case of the five largest packers a maximum margin on meat of 
9 per cent on investment was named. The flour millers also 
were limited to a profit of 25 cents per barrel. Dealers in 
cottonseed and peanuts, both ginners and others, were limited, 
beginning with July i, 191 8, to a margin of $3.00 over cost 
(not replacement value). This method was also largely used 
by the Fuel Administration in an attempt to regulate the price 



22 POLITICAL SCIENCE QUARTERLY 

of coal to consumers, and in this connection the rather elaborate 
regulation of the margins to be made by the lake forwarders is 
noteworthy. The margins effective June i, 191 8, ran from 20 
to 95 cents per ton according to the nature of the transaction. 
In a considerable number of cases the rates of commission or 
margins of profit were imposed not only on dealers in coal, 
meat and flour, but also on those in newsprint paper, retail 
lumber and other commodities. In addition to all this there was 
the attempt to fix retail prices directly by publishing fair prices, 
as was done by the Food Administration in the case of groceries. 

When the cost to a dealer of a commodity is definitely 
fixed, and the dealer's margin is definitely limited to a certain 
amount per unit of product, the resulting price may be said to 
be fixed with a considerable degree of precision ; but when 
the base price is not definite, or when the amount of margin 
is expressed in terms of a percentage on investment, sales, 
price or cost, the resulting price cannot be said to be precisely 
fixed. A margin fixed as a percentage on cost is a more 
definite sum than one fixed as a percentage on sales or on in- 
vestment. Indeed, there is an element of circuity when the 
selling price is made the basis, as the higher the price, the 
larger is the absolute amount of the margin required to return 
any given percentage on sales. Apparently the fixing of 
margins, which was prevalent in attempting to control the prices 
charged by middlemen and dealers, generally resulted from a 
desire to extend price control more directly to the " public ; " 
that is, the f. o. b. mill prices of basic commodities having been 
regulated, it became necessary to regulate the margins which 
the middleman might add to the manufacturer's prices. How- 
ever, as will be observed at another point in these articles, the 
various attempts of the Food Administration to limit profits 
cannot be said to have been thoroughly effective. 

Price fixing in the way of restrictions on margins passed 
into the realm of hopes and aspirations in such cases as the 
earlier regulation of the lake forwarders by the Fuel Ad- 
ministration, and the cotton ginners by the Food Admin- 
istration, for in these cases the producers were merely 
urged to charge "reasonable" prices. Much the same may 



PRICE FIXING DURING THE WAR 23 

be said of the somewhat tentative moves made by the Oil 
Division of the Fuel Administration toward fixing the price 
of petroleum and its products. In July, 1918, the Oil Di- 
rector made some proposals with regard to fixing the differ- 
ential between the prices of crude and those of refined pro- 
ducts ; and about the middle of August he announced a plan 
to stabilize the price of crude oil, stating his belief that this 
would prevent radical changes in the price of refined products. 
It does not appear, however, that the plan had any appreciable 
affect upon prices. 

It seems fair to conclude that, from the foregoing point of 
view, there were three chief types of price fixing : ( i ) maximum 
prices, in the case of basic staples which have wide public in- 
terest, — often recognized as " pegged " prices when any scarcity 
or rapidly advancing cost exists; (2) definite prices, {2.) to 
encourage production by guaranteeing returns, (b) govern- 
ment purchases (direct or indirect) in the nature of single 
transactions; (3) margins, (a) absolute amount per unit, 
(b) percentage on sales, cost, or investment, this method being 
used when it was desired to cover the distribution of products, 
the marketing of which was not integrated with manufacture. 
The minimum price, strictly speaking, was the exception, but is 
logically associated with the definite price which is both maxi- 
mum and minimum. 

Another distinction of some importance with regard to the 
method of fixing prices involves the point at which the price 
named was to apply. Some prices were made on an f. o. b. fac- 
tory basis, while others were on a delivered basis. In this re- 
spect the practice prevailing in the industry was partly followed. 
The tendency, however, was to fix prices on an f. o. b. factory 
or mill basis, a natural tendency when the price is based on cost. 
In a majority of cases, prices came to be made f. o. b. the pro- 
ducer's plant. 

In many cases, however, it was common to quote prices f. o. b. 
some market basing point. This was notably the case with 
such products as copper, which was always quoted f. o. b. New 
York, although the metal was secured from mines in Michigan, 
Montana and Arizona, and refined at various seaboard points. 



24 POLITICAL SCIENCE QUARTERLY 

The price of " packer " hides when fixed was " based on Chicago 
freight," which meant that three-fourths of a cent per pound 
was to be deducted from the price made by the Pacific Coast 
producers, and that in shipments from other states, the price 
was not to exceed the price on Chicago shipments. Further, 
the price of North CaroHna pine was fixed on the basis of de- 
liveries to Virginia " gateways. " 

In the case of commodities for which there were several com- 
peting producing areas, there was often a tendency to quote 
prices on a delivered basis. Prices delivered were fixed on 
New England spruce, Pennsylvania hemlock, cement, hollow 
building tile, iron and steel scrap, and oil products for the navy. 
The situation in the case of hollow building tile will furnish 
some explanation of this tendency. The chief producing 
area for this commodity is centered in Ohio, while there are 
other producing territories in the south, in New Jersey and 
elsewhere. In order to stabilize market conditions and to 
divide the market, the representatives of the industry desired 
to fix prices on a delivered basis. In this way, by fixing a de- 
livered price sufficiently low, they would prevent the low-cost 
producers in Ohio from coming too far east with their product; 
while, if the price were fixed f. o. b. the plant, there would be no 
limit to the area which might be covered by the low-cost pro- 
ducer, except cost of freight and desire for profit. The pro- 
ducers of yellow pine lumber also objected strongly to fixing 
prices on an f. o. b. mill basis, their motive being to preserve the 
status quo in the distribution of territory among the southern 
pine producers, and between such producers and the west coast 
lumbermen. They argued that an average base price on mill- 
run lumber would be affected by changing the market areas; 
that delivered prices were the custom of the trade ; that the 
weight of lumber, and consequently the freight rate, was uncer- 
tain, (the amount of moisture being affected by seasonal condi- 
tions) ; and that the disturbances in producing areas which 
would result, would be a public disadvantage. Nevertheless, 
the tendency was away from the delivered basis, as is illustrated 
by the fact that southern pine lumber prices were made f. o. b. 
mill ; and that in the case of hemlock lumber, the system of 



PRICE FIXING DURING THE WAR 25 

delivered prices was discontinued in May, 19 18, and f. o. b. mill 
prices were substituted therefor. 

Had the war continued much longer, there can be little doubt 
that adjustments in railway rates would have become a part of 
the price-fixing program, — just as rates on government railways 
have in several countries been a part of the system of protection. 
Special railway service was given in a number of instances as a 
direct part of price fixing, as, for example, the arrangements 
made to furnish transportation to the Douglas fir lumber mills 
for the purpose of relieving them of accumulations of low-grade 
lumber. In the case of price fixing on manganese ore produced 
in the United States, an integral part of the scheme was the 
announcement of special railway rates applying to such ores. 

Prices were fixed for various periods of time, but in general 
it may be said that on account of changing conditions the 
periods were short. Perhaps the period most frequently chosen 
as the one during which the price was to apply was three 
months. A much shorter period would have created too much 
risk and uncertainty in marketing, to say nothing of the strain 
upon the price-fixing machinery; while a longer period was not, 
as a rule, desired by the representatives of the industries, espe- 
cially during a period oT increasing costs. Various special excep- 
tions might be cited, such as the case of wheat, in which the 
price was fixed for the crop of a given season. The prices of 
meat and coal were fixed for indefinite periods, and the same 
was true of manganese ore. The price-fixing announcement 
with regard to New England spruce stated that the price was 
to remain in effect till July i, 1918, or such prior time as the 
Federal Trade Commission might report concerning costs. 

In numerous cases the price was left open, pending some 
form of determination after the delivery of the commodity. 
Thus, canned salmon bought by the Subsistence Division of the 
Army was partly paid for by " advances," pending the determi- 
nation of the cost of production by the Federal Trade Commis- 
sion. Considerable quantities of wall board and common brick 
were delivered for use in government construction during 19 1 8, 
although the prices were not determined until January and 
February, 19 19. 



26 POLITICAL SCIENCE QUARTERLY' 

II 

IN the first article of this series price fixing in the United 
States during the war was discussed with regard to its 
scope, its agencies and its methods. The present article 
is intended as a critical and analytical study of the activities of 
the principal price-fixing agencies. Its object is so to classify 
and analyze the various cases of price fixing as to make clear 
the nature of the problems that were involved and to suggest 
principles. These two articles, it is hoped, will furnish an ade- 
quate basis for a critical appraisal of the price-fixing policy of 
the United States during the war which will be the subject of 
a concluding article. 

To fix or not to fix was the first problem to confront the 
price-fixing agency when its services were invoked. In not a 
few instances a study of the situation revealed that price fixing 
was unnecessary or was even positively undesirable. Some- 
times representatives of an industry wished to have prices fixed 
for the purpose of facilitating a program designed to eliminate 
competition or to enable them to maintain very profitable 
prices. Sometimes, also, buyers demanded price fixing, when, 
as a matter of fact, prices received by producers were, relative 
to their costs, quite low ; and, on the other hand, producers of 
raw materials sometimes urged it, as in the case of zinc ore, 
when, as a matter of fact, the margins made by the manufac- 
turers were small. In the case of common zinc, or " prime 
western spelter", price fixing was contemplated, and the cost 
of production was ascertained by the Federal Trade Commis- 
sion, No price, however, was fixed ; and while the results of 
the investigation were not published, it was generally known 
that common zinc was being sold at less than cost. The pro- 
duction capacity was in excess of demand, which had fallen off 
greatly. Under these circumstances, it would have been eco- 
nomically undesirable to fix a price on the basis of cost plus a 
reasonable return on investment, since it would have delayed 
the inevitable adjustment of supply to demand. This was 
recognized by leaders in the zinc industry. 



PRICE FIXING IN UNITED STA TES DURING THE WAR 2 7 

In the case of mohair, it was decided after a conference be- 
tween representatives of the Mohair Growers and Producers 
Association and the Wool Section of the War Industries Board, 
not to fix a price on the fall clip of 191 8. The War Industries 
Board announced that the cost of producing mohair appeared 
to be in excess of anything the government could afford to pay, 
considering the uses to which this product could be put, and 
that the needs of the government were not such that it then felt 
justified in fixing the price below the cost of production claimed 
by the growers. 

The problem of whether to fix prices or not presented itself 
very forcibly to the Oil Division of the Fuel Administration 
and was virtually answered in the negative. All that the public 
knows is that, while the price of ordinary gasoline was not ad- 
vanced, the prices of the other petroleum products yielded 
jointly with gasoline — notably fuel oil — were greatly increased, 
with the result that during 19 18 the average profits of refining 
companies were considerably larger than during the three years, 
1913, 1914 and 1915.' 

In the cases in which it was decided to fix a price, the chief 
problems may be conveniently discussed under the heads of 
cost, demand and investment, together with sections on such 
practical aspects as integration and contracts. 

I . Marginal Cost as a Basis for Price Fixing 
Various bases for determining the reasonable maximum price 
to be fixed were used, but it may be said that, on the whole, 
the prevailing tendency was to fix prices on the basis of cost, 
a reasonable allowance being added for profits. In this con- 
nection the work of the Federal Trade Commission in ascer- 
taining from the books of the producers the actual cost of 
production and the investment, was of great importance ; and 
President Wilson early indicated that the Commission's findings 
should be fundamental in connection with the price-fixing 
activities of the War Industries Board. While the bulk of the 

' Federal Trade Commission Report on Profiteering, 1918; published as Sen. Doc. 
no. 248, June 27, iQi8. 



28 POLITICAL SCIENCE QUARTERLY 

cost work was done for the War Industries Board, it should be 
noted that the Fuel Administration, in regulating coal prices, 
had to proceed under certain definite rules laid down in the so- 
called Lever Act of August 10, 191 7, which provided for the 
fixation of maximum prices, based on " the cost of production, 
including the expense of operation, maintenance, depreciation 
and depletion ", adding thereto "a just and reasonable profit". 
In fixing prices for coal dealers, the price-fixing agency, the 
law runs, " shall allow the cost to the dealer and shall add 
thereto a just and reasonable profit".' With regard to the 
work of the Fuel Administration on coal (not oil), the large 
amount of intensive statistical and accounting work that was 
done should be noted. A large force of Federal Trade Com- 
mission statisticians and accountants was put at the disposal of 
the Fuel Administration. Though perhaps impossible to an- 
swer, the question is worth raising, whether the relatively large 
volume of criticism directed toward fixing prices of coal (not 
oil) is not indicative merely of a more accurate basing of 
prices on marginal cost than obtained in most other cases. 

Beyond a doubt, the fundamental question in fixing prices 
that are based on cost, is the determination of what may be 
called the " marginal cost ". This cost may be explained as fol- 
lows: It is frequently the case that when the several individual 
costs for a group of producers are accurately ascertained and 
are ranged in their order from low to high, there will be a var- 
iation among them of lOO per cent., the high cost being double 
that of the low cost. Ordinarily the bulk of the production 
comes from those companies whose costs are below the aver- 
age, though this is not always the case. It does not follow, 
however, that the average cost gives the basis for a fair price. 
If 25 per cent., or even 10 per cent., of the production comes 
from high-cost companies, and the entire output is needed, the 
average cost cannot be the basis of price. It is true that in 
many cases prices were fixed on the basis of average cost, both 
by the War Industries Board and by other price-fixing agencies ; 
but as time went on their methods were perfected, and the 

' See below, p. 43. 



PRICE FIXING IN UNITED STATES DURING THE WAR 29 

practice of taking a " representative cost " developed. This 
representative cost was very similar to what the economist calls 
the marginal cost, meaning the cost of the highest-cost produ- 
cer able to produce without loss at any given price. It was 
sometimes called the "bulk-line figure". In price fixing, of 
course, the price is not established by objective market forces 
but is to be determined ; and the marginal cost depends upon 
the quantity required and the cost of the least efficient producer 
who has to be included in order to call forth that quantity. 
Largely on the basis of experience in certain basic industries, 
the representative cost was often taken to be that cost which 
was just high enough to cover the costs of those lower-cost 
companies which could produce 80 per cent, of the total pro- 
duction. It will be found that if the costs of the producers of 
any industry are arranged in a series from low to high, there 
will be a relatively few very low costs and a relatively few very 
high costs ; and if the lower-cost producers required to make 
up 80 per cent, of the production are taken in one group, most 
of the remaining producers will fall in the group of those having 
very high costs. As the high costs of such producers are at- 
tributable either to abnormal conditions or to inefficiency or to 
unfavorable natural conditions, it is reasonable to ignore them 
in the determination of representative costs. Ordinarily they 
either would not make much, if any, profit under competitive 
conditions or their high costs are caused by abnormal conditions 
which they hope will disappear. 

The elimination of some of the high costs and the use of 
some marginal figure, was especially necessary when monthly 
costs were used as the basis of price fixing, since the cost ascer- 
tained for a single month may be quite abnormal on account of 
a temporary reduction in output or the inclusion of items which 
should be spread over a longer period. Consequently, to base 
prices on a series of maximum monthly costs would give impos- 
sible results. To a considerable degree the same observation 
applies to quarterly costs. 

It is true, as already observed, that average costs were some- 
times used ; but it will be found that where this was done, one 



30 POLITICAL SCIENCE QUARTERLY 

or another of the three following conditions prevailed:' (i) 
The " costs " used were not true costs, perhaps including interest 
on investment or allowance for contingencies or profits on raw 
materials used; (2) the allowance made for margin over cost 
was liberal enough to take care of the producers whose costs 
were above the average; (3) the position of the industry v.-as 
such that the producers were willing to take a low price. There 
is no sound argument to be made in favor of using the average 
cost. If a smaller output is desired, it is to be gained by mov- 
ing the margin or "bulk line" down to a point at which the 
output of the marginal and supra-marginal producers equals 
the desired quantity. 

In the average case of price fixing, the gist of the method 
used by the Price-Fixing Committee was as follows : First, some 
idea of the quantity of the product under consideration which 
was likely to be demanded, was arrived at, which, of course, in- 
volved a knowledge of the stocks on hand. Second, the quan- 
tity which each producer could turn out was ascertained. Third, 
each producer's cost of production was computed for the 
most recent period available. Fourth, the average investment 
involved in the production of the commodity concerned was 
determined and reduced to the basis of investment per unit 
of product. 

The first three of these items bear directly upon the determi- 
nation of the representative or marginal company for price- 
fixing purposes. Take, for example, the case of copper. If,, 
after due consideration of stocks on hand, it should be deter- 
mined that the needs of the government are 100,000,000 pounds 
per month, that the larger companies, having lower costs, are 
producing about 100,000,000 pounds per month, and that the 
highest cost of any of these larger companies is 19 cents per 
pound, then the representative or marginal cost may be taken 
to be 19 cents. This procedure would be logically strengthened 
if it happened that the production of the smaller companies was 
only a small percentage of the total output of copper, say 1 5 

'On this point see L. H. Haney "Price P'ixing in a Competitive Industry; A. 
Pioneer Case", American Economic Revieav, March, 1919. 



/RICE FIXING IN UNITED STATES DURING THE WAR 



31 



per cent., and that the higher costs of such companies are due 
to inefficiency in the sense that they have not been able during 
recent years to make any regular net earnings. Under such an 
assumed case a " bulk line ", or margin, might be fixed at some- 
thing over 80 per cent, of the total production and 19 cents per 
pound be used as the cost upon which price fixing would be 
based. If, now, it were the fact that representative copper 
producers had in normal years made margins of about 6 cents 
per pound over their cost, the basis for a price in the neighbor- 
hood of 25 cents per pound would be established. 

The conditions which facilitate the determination of a reason- 
able marginal cost for price fixing are : (l ) a knowledge of the 
requirements of the market, or in wartimes a knowledge of the 
needs of the government and its agencies; (2) a knowledge 
of the output and capacity of the plants concerned; and (3) 
the existence of an output or an immediately available capacity 
which is equal to or in excess of the requirements. There can 
be no doubt that price fixing in the United States was handi- 
capped by uncertainty as to the quantity which it was desired 
to have produced, which uncertainty was in some cases due both 
to ignorance of the available stocks and to uncertainty as to 
future requirements. Naturally these conditions obtained most 
notably in the earlier months of the war, and the organization 
of staffs to collect exact statistics for the War Industries Board 
improved matters as time went on. But a part of the difficulty 
lay in the wavering programs of the different departments en- 
gaged in war construction of one kind or another. It was a 
difficulty inherent in the situation that the departments were apt 
to overestimate their needs, while the producers were apt to 
overestimate their capacities and underestimate their stocks. 
When the industry was obviously able to produce in excess of 
a possible demand of its product, as was the case with lumber 
and cement, it was relatively easy to insist upon the use of a 
representative cost which had some real marginal significance, 
that is, one which was only high enough to just cover the 
highest-cost producer needed to supply the quantity required. 
But when, as was the case with copper, the best available figures 
seemed to indicate that production would be almost exactly 



32 POLITICAL SCIENCE QUARTERLY 

balanced by consumption, it became more difficult to deal 
with the importunities of the high-cost producers; and when a 
known shortage existed, or was believed to exist, as in the case 
of wheat,' ship timbers, quicksilver and copper, the price-fixing 
agencies were apt to fix the price with little regard to cost. In 
some cases, e. g., wall board, this disregard of cost was con- 
cealed by authorizing the companies to proceed with production 
and even to construct new plants with the understanding that 
the price would be fixed at some subsequent time on the basis 
of cost. 

Of course, when the three conditions enumerated above were 
absent, the determination of the margin was made much more 
difficult. In the writer's judgment, however, the problem of 
determining a satisfactory marginal cost for price fixing is not 
insoluble, and as this is perhaps the crucial point in price fixing, 
a word should be said about it. There are two great dangers 
to be reckoned with. In the first place, there is the danger that 
the requirements will not be correctly estimated, especially when 
a commercial market exists over and above the government's 
needs. One factor in the situation which must remain unknown 
in war times is the duration of the war, a factor whose import- 
ance is now amply illustrated by the problem of dealing with 
large government stocks of materials which followed the rela- 
tively sudden signing of the armistice. In any event, war re- 
quirements may differ widely from those of normal times. It is 
easy to make too great concessions to those who desire to keep 
" business as usual ", and to underestimate the requirements of 
the military program. The second danger lies in a failure to 
adjust the required production to an efficiency basis. By this 
is meant that the price-fixing agency may fail to take the steps 
necessary to insure that the quantity of the product under 
consideration will be secured as largely as possible from low- 
cost, efficient producers. There was an unfortunate tendency 
to spread the business over the entire range of existing produ- 
cers, instead of concentrating it as much as possible with the 

'The minimum price of wheat was fixed with regard to such imperfect cost data 
as were available. 



FRICE FIXING IN UNITED ST A TES DURING THE WAR 33 

more efficient. This constituted a touch of " stabilization". In 
dealing with cement, for example, it is probable that the gov- 
ernment and the public would have been much more cheaply 
supplied had some of the high-cost plants been closed down 
and the most efficient ones operated at capacity.' 

But, in spite of these dangers, much can be done and was 
done to arrive at a reasonable basis. It is to be borne in mind 
that prices were fixed at frequent intervals and applied for a 
short period, say three months. Accordingly, recent experi- 
ence could be drawn upon. For example, the actual require- 
ments of the preceding three months could be known; and, 
furthermore, the rate of increase or decrease in requirements 
during a series of preceding short periods could be used as a 
basis of estimate. Moreover, the estimates of requirements 
were made for a relatively short period and could be revised at 
the expiration thereof. It was also possible to make allowance 
for increase in the output by the larger and more efficient pro- 
ducers, although but few, if any, illustrations of such allowance 
can be found in the actual practice of price fixing. That, how- 
ever, is a limitation of price fixing as actually conducted, not as 
it might be conducted ; and the fact remains that copper prices 
might have been somewhat lower without reducing the total 
ouiput of copper, for the reason that the large producers could 
easily have used the labor employed by the small, high-cost 
producers to a better advantage. 

2. Integratioti in Relation to Price Fixing 

The existence of different degrees of integration among the 
different companies engaged in a given industry gives rise to 
difficult problems in price fixing which are related to cost. 
On the whole, the tendency of the Price-Fixing Committee of 
the War Industries Board was to deal solely with the price of 
finished product (chiefly the basic materials of industry) f. o. b. 
the plant of the manufacturer, regardless of the differences in 
degree of integration. There were some important exceptions 

' In a few cases, cement companies actually did close plants and supply their cus- 
tomers from the most efHcient single source. 



34 POLITICAL SCIENCE QUARTERLY 

to this policy, however, notably in the cases of iron and steel ; 
and other price-fixing agencies, such as the Fuel and Food 
Administrations, pursued a different plan. In general, it may 
be said that when the price was fixed on a finished article of 
wide consumption, separate prices were fixed for the different 
stages of production, as is illustrated by the fact that prices 
were named not only on flour, but also on wheat and on bread. 
This was especially true when a large part of the product was 
produced by non-integrated concerns. 

The logic of the War Industries Board seems to have been 
to fix the price of the basic materials and to rely upon such 
action to affect the whole price structure, supplementing it by 
regulation designed to restrict speculation by dealers and to 
prevent unnecessary resales. It will be observed that this 
policy leaves the various stages of production, prior to the 
emerging of a finished product, without price regulation. A 
good illustration is furnished by copper. In this industry it is 
true that the integrated companies are decidedly the dominant 
element. It is true that there are wide differences in the de- 
gree of integration, ranging from the complete integration of 
the Anaconda Copper Company down to an almost complete 
lack of integration in the case of numerous small mines which 
ship their ore or concentrates to some big smelting company 
in Arizona. The smelting company in turn may ship " blister " 
copper to a separate refinery on the Atlantic seaboard. 
Copper ore may be bought and sold ; and the product of the 
smelteries, whether "matte" or "blister", may also have a 
separate price. Moreover, the owners of independent copper 
mines have in some cases demanded that the price of their 
ores be fixed in order to protect them against the hard terms 
made by the smelting companies. Indeed, some formal pro- 
tection to the mines was afforded through the good offices of 
the Non-Ferrous Metals Division of the War Industries Board ; 
and with the help of the same agency, by agreement between 
the smelters and refiners, an adjustment was made in the pay- 
ment received by the copper refiners which amounted to a 
modification of the price of " blister " copper. The quantity 
of copper produced by the small miners, however, is relatively 



/■> 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 35 

SO unimportant, and the refiners are so closely related to the 
large miners and smelters, that these adjustments are hardly to 
be considered as exceptions to the rule. The only price fixed 
was that on refined copper/ 

The iron and steel industry is different from the copper in- 
dustry, in that the number of different stages and products is 
greater, and the integration accordingly is not only much more 
complex, but less uniformity exists among the producers. In- 
deed, the production of raw steel — or, perhaps, even pig iron — 
is analogous to the production of copper, while the combina- 
tion of the manufacture of iron and steel with the manufac- 
ture of coke, and the production of steel and the numerous 
steel products by the same companies which produced the pig 
iron, makes this industry much more of a problem to the price 
fixer. A considerable part of the product is made by con- 
cerns which are not completely integrated. Accordingly, not 
only was a price fixed on iron and steel products, but also on 
iron ore, pig iron and raw steel. More than this, while the 
earlier price fixed for steel products was not advanced, the 
prices of pig iron and of iron ore, which products are partly 
produced by separate non-integrated concerns, were somewhat 
raised. Also, by arrangement with the industry the least inte- 
grated producers were furnished their raw steel at a price some- 
what under the marginal cost price for that product. 

The general conclusion, therefore, to be drawn concerning 
the relation of integration to price fixing is that when a con- 
trolling part of the supply of any given product is produced by 
concerns which are not completely integrated, especially as to 
the earlier stages of the industry, it is practically necessary, in 
price fixing, to control the price of the chief semi-finished pro- 
ducts ; but that when a controlling proportion of a product 
comes from producers who are more or less completely inte- 
grated, this necessity does not exist, although some protection 
may be required for independent producers in the earlier stages. 
Also when the object is to protect the consumer of products 

* This is approximately true, but a differential was fixed to cover the extra cost of 
casting refined copper in certain shapes or molds. 



36 POLITICAL SCIENCE QUARTERLY 

which are distributed by separate wholesale and retail agencies, 
it would probably be necessary to control the wholesale and 
retail prices as well as the price f. o. b. factory or mill. 

• 3 , Minor Problems Connected with Cost 

Numerous minor problems involved in ascertaining the cost 
basis for price fixing might be distinguished. It was frequently 
the case that actual cost figures were not available at the incep- 
tion of price fixing and in such cases it was common for repre- 
sentatives of the industry concerned to appear with statements 
showing large percentages of increase in their costs for labor 
and materials. Such claims generally proved to be specious. 
The cost of labor may increase lOO per cent, and the price paid 
for explosives 300 per cent., while the total cost per unit of the 
finished product may increase but 10 per cent, or may actually 
decrease. The Price-Fixing Committee early found that a 
controlling factor in unit costs was the volume of output, which 
was often closely associated with the grade or quality of the raw 
material and, in spite of increases in various individual items of 
cost, a considerable increase in volume of production by plants 
not already working at full capacity might more than offset 
such increases by increasing the quantity used as a divisor. 

Even when the actual figures were presented, it was not in- 
frequently the case that they were erroneous or not representa- 
tive. Among the more common shortcomings of the cost data 
submitted were : the inclusion of items of cost in the charges 
for a particular period, which should have been spread over a 
longer period ; the inclusion in cost of items which should have 
been capitalized as being additions and betterments ; the inclu- 
sion in cost of items which should have been charged directly 
to the profit-and-loss account or have been deducted from the 
selling price ; and the presentation of costs based on abnormal 
operating conditions. The last point would be illustrated by 
the case of a lumber company which voluntarily or involuntarily 
operated during a given month under abnormally difficult con- 
ditions, such as peculiarly rough or swampy land and poor 
timber, i. e., mixed, scattered, small, blown down. 

Even when the actual figures were available and covered rep- 



t'RICE FIXING IN UNITED ST A TES DURING THE WAR 3 7 

resentative operations, their shortcomings, as a basis of cost 
computation for price-fixing purposes, were sometimes appar- 
ent. Cost, to the accountant, properly covers only such items 
of expenditure as are actually paid out or accrued during the 
period under consideration. Consequently, certain risks and 
hazards, which are covered by what the economist knows as 
gross profits, do not appear upon the books ; some of these 
items might even be the result of the price-fixing operation. 
For example, there was often an uncertainty as to the market, 
especially in the case of by-products.' During the war labor 
and transportation difficulties in some cases lengthened the 
period of the " turnover", making the period during which the 
material was " in process " longer, with additional risks and 
carrying charges. A condition frequently met with was that 
of a real or alleged necessity for maintaining a selling organi- 
zation which was not needed in connection with government 
purchases. It was argued, and in some cases rightly, that the 
company could not afford to sell to the government at a price 
which would not contribute something toward the maintenance 
of a selling organization which had been built up at great ex- 
pense and which would be vital to the existence of the company 
under normal circumstances. Here, too, may be mentioned 
the fact that in most cases a period of at least a month neces- 
sarily elapsed between the time that the cost figures were avail- 
able to the price fixer and the period to which the figures 
applied. Consequently, it was almost always necessary to make 
some allowance for variation in costs between the period for. 
which the figures were secured and the period during which the 
price was to apply. This might be vaguely allowed for in the 
shape of a " liberal" treatment, or attempt at greater definite- 
ness might be made by adding to the costs a certain percentage, 
based on the rate of increase for a similar period in the past. 
In several industries it was found that between the autumn of 
1917 and the middle of 1918, costs increased about 30 per 
cent. ; and when costs were available only for the second half of 
191 7 for fixing a price in the middle of 191 8, this percentage 

' See below, p. 39. 



38 POLITICAL SCIENCE QUARTERLY 

was added to the available costs, as was the case with sand and 
gravel. 

In several instances, when labor cost was the chief factor in 
the situation, the percentage of that cost to the total cost was 
ascertained and this percentage applied to a known increase in 
pay-roll to estimate the current cost. This method was at one 
time used in the cases of lumber and copper. Assuming any 
given volume of output, it is easily possible to make a very 
close estimate as to the effect of a given advance in wages upon 
the average cost per unit of product. And during a period of 
increasing wages, such estimates may be very useful. 

4. Demand ; Joint Cost and hiterrelated Products 
The price-fixing agencies were soon confronted by the diffi- 
culties which attend any dealing with products which are jointly 
produced ; that is, different products which are produced with 
a joint cost that cannot be specifically assigned to any one of 
them. Two general cases of this sort may be distinguished : 
First, the products may all be commercially of similar impor- 
tance and may all be called main products. As such, each of 
them is ordinarily sold at a price which allows a profit over the 
average cost of production of the group, and the producer con- 
sequently desires to increase his output of each of them. This 
is the case with the principal kinds of lumber and timbers se- 
cured from a log ; and another good illustration is found in the 
gasoline and fuel oil secured from a barrel of crude petroleum. 
A variation of the same idea is illustrated by the different 
grades of logs secured by lumbering operation, for in this case 
we do not have products which differ in kind, as do gasoline and 
fuel oil, but, instead, the difference lies merely in the length of 
the log etc. The second case of joint production involves what 
are called by-products. Such products are in a commercial 
sense relatively unimportant to the company producing them. 
They are well illustrated by the recovery of small amounts of 
the precious metals from copper ores which are smelted solely 
for the purpose of recovering copper and would be so smelted 
even if there were no gold or silver in them. The by-product 
is either relatively small in total value or is apt to sell consider- 



PRICE FIXING IN UNITED STATES DURING THE WAR 39 

ably below the average cost of the group, and the producer, 
therefore, desires to reduce the output to a minimum. 

With regard to individual joint products, it is impossible to 
ascertain an exact cost, but cost can be used only as a rough, 
general guide to price. As a rule, therefore, the procedure has 
been to ascertain the average cost for the group of joint pro- 
ducts as a starting point. Then, one of two courses has been 
taken ; either an addition has been made to the average cost to 
allow a return on the average investment, thus arriving at an 
average price, or the average cost has been allocated to the 
several joint products and additions made to the allocated costs 
to arrive at separate prices for the said products. 

For by-products the general rule was to fix a price on the 
main product only, the by-product being covered by deducting 
from the cost of the main product' the net returns received 
from the sale of the by-product. For example, the cost of 
copper was reduced by the value of the gold and silver recov- 
ered. This was the course taken when the by-product was 
salable. In case, however, there was no market for it, or in 
case the market was rendered precarious, the procedure was 
either to add the loss on the by-product to the cost of the main 
product or to make some estimate in the shape of an allowance 
for risk. This was done in the case of the government price 
for mahogany lumber for propeller blades. It was felt that a 
large quantity of low-grade mahogany lumber would result from 
the efforts of the companies to supply the government with 
propeller stock and that the accumulation of such low-grade 
stock might result in a loss to the producer. 

Clearly, in case of joint production, the price fixer is forced 
to take demand as a chief basis, rather than cost. This is also 
true, as will be shown, of other interrelations in production. 

Other interrelations between products which complicated 
price fixing existed almost without number. Two entirely sep- 
arate products may have the same raw material, with the result 
that it becomes necessary to consider the effect of increasing 

1 This, of course, includes a large part of the cost involved in securing the by- 
product. 



40 POLITICAL SCIENCE QUARTERLY 

the price of one of the products over that of the other, thus 
giving it greater power to command the raw material. Such 
was notably the case with fertilizer and explosives. Both re- 
quired large quantities of sulphur, and if the price of sulphur 
had been fixed too low, sulphuric acid manufacturers would 
have been encouraged to burn brimstone to an increasing extent 
in place of sulphur-bearing ores. Also munition linters, cotton- 
seed oil and meal, all come from the same material, cottonseed ; 
and an important and difficult problem confronted the Food 
Administration in so adjusting the price of oil that cottonseed 
meal might be kept at a reasonable price. 

Again, two products may be interrelated by being combined 
to make a finished product, as iron and zinc which are combined 
to make galvanized iron, zinc and copper to make brass or gyp- 
sum and paper to make wall board. The high price of iron 
was reflected in the price of galvanized iron, with the result that 
the demand was greatly reduced, and the price of zinc fell so 
low that after investigation it was not found necessary to fix it. 

Finally, two or more products may be substitutes. This is 
notably true of certain fuels, — coke, coal and fuel oil; certain 
raw materials, — pyrites and sulphur ; various metals ; and cer- 
tain consumption goods, such as wheat and corn, cottonseed oil 
and other vegetable oils. 

An excellent illustration of the complexity of price fixing 
under such circumstances is furnished by the Food Administra- 
tion in dealing with the cottonseed industry. About Septem- 
ber, 191 8, a great demand arose within the cottonseed industry 
for " stabilization". Cottonseed oil prices showed a downward 
tendency on account of the competition of foreign vegetable 
oils which could be substituted for the domestic product, and as 
a result it appeared to be necessary to advance the price of 
cottonseed meal, which was a joint product with the oil. Such 
an advance would increase the expenses of cattle feeders. In 
conference with the Food Administration, the producers recom- 
mended prices which were practically the same as those of the 
preceding year, this being a concession to the interest of the 
cattle-feeding and dairy industry; the crushers had differentials 
fixed to allow for their increased costs; but nothing could be 



t'RICE FIXING IN UNITED ST A TES DURING THE WAR 4 1 

done with regard to the linters, except to recommend that the 
War Industries Board increase the price thereon, to make this 
product help bear the burden. The refiners agreed with the 
Food Administration to buy cottonseed oil at 17^ cents f. o. b. 
the mills, the Food Administration agreeing to assist the refi- 
ners in maintaining this price. In their turn the manufacturers 
of lard compound, with the sanction of the Food Administra- 
tion, agreed to a price of 22^ cents per pound. The net result 
of this interrelated chain of price fixings was that the price of 
cottonseed meal was made from $50 to $75 per ton, depending 
upon the protein content, — a small advance of approximately 
$3 over the price of the preceding year. The Food Adminis- 
tration regretted the necessit>' of increasing the price of meal, 
but it had to be done in order to maintain the price of oil. 

Early in 19 19, doubt arose as to the continued participation of 
the Food Administration in this stabilization plan and also the 
importation of foreign oils, which sold below cottonseed oil, 
continued. Then, too, there were some local accumulations of 
cottonseed and cottonseed oil. Therefore, in February, a meet- 
ing was called, at which representatives of all the stages agreed 
to maintain the plan, and the Food Administration promised to 
do what it could to that end. An embargo on the importation 
of foreign oils was recommended to the War Trade Board, and 
steps were taken to insure the use of the domestic product in 
the manufacture of lard substitutes, the refiners promising to 
help in this and the Food Administration to require the domes- 
tic product on orders which were allocated through it. 

Thus, in this case the price-fixing agency had to deal with a 
very complicated situation, on account of the interrelation of 
numerous products; and, partly for the purpose of keeping 
meat prices down, it sought to keep meal prices down by 
keeping the prices of linters and oil up. Incidentally the plan 
involved a stabilization of the whole industry, with the idea of 
maintaining the supply and of keeping products moving for- 
ward in the normal quantity and relation. 

Another illustration of the complex interrelation between 
products and the resulting difficulties which confronted price 
fixing is furnished by the hen and the tgg. The live hen is, 



42 POLITICAL SCIENCE QUARTERLY 

as it were, the raw material for the two products, eggs and 
chicken meat. The Food Administration fixed the price of 
eggs so low, relatively to the price of chicken feed, that the 
egg business became unprofitable, and hens were killed in large 
numbers. This case illustrates the need of regulating the 
earlier stages of a non-integrated industry. 

In the case of substitutes, the problem of the price fixers was 
chiefly one of demand, not directly of cost. For example, the 
cost of a substitute might necessarily be ignored, as was prac- 
tically true of Virginia-Carolina pine. The price of southern 
yellow pine having been fixed, the other pine could not stand 
in the market more than a certain fixed differential, and its 
price had to be set at a figure which was below the cost of a 
large part of the production. It was in the face of such com- 
plicated problems as this that the Food Administration made 
some of its chief errors, notably in not regulating the prices of 
various grains which were obviously, either directly or indi- 
rectly, substitutes for wheat. 

The foregoing discussion of the problems of price fixing on 
the demand side illustrates the impossibility of basing prices 
entirely on cost. It was often necessary to make some allow- 
ance for demand and sometimes to make so great an allowance 
as to deprive cost of any appreciable significance as a factor in 
price fixing. 

Sometimes, in fact, the cost was not known, perhaps because 
of haste or because of difficulty in securing satisfactory data. 
In this event the attempt was sometimes made to find some 
basis in cost, which might be accomplished by adding a known 
increase in cost to the old price, as was done in determining 
cotton-compress rates. Also, in September, 191 8, an addition 
was made to the price of crushing cottonseed, presumably suffi- 
cient to cover increase in cost. A point of difference in these 
two cases, however, lies in the fact that the base price of crush- 
ing cottonseed had been previously determined by a govern- 
mental agency, while this was not the case with compressing 
cotton. About the middle of 1918, the price of copper was 
suddenly advanced by an amount estimated to equal the in- 
crease in freight rates and wages which became effective at that 



PRICE FIXING IN UNITED STATES DURING THE WAR 43 

time. In a few extreme cases, however, there was not even a 
pretense of proceeding on a cost basis. The first price for 
bituminous coal in 1917 was made on the basis of the past 
prices as furnished by the Geological Survey. Platinum and 
iridium had their prices fixed at the high levels prevailing in 
the market; and the Emergency Fleet Corporation's price for 
ship timbers appears to have been arrived at on the basis of 
previous prices. In the case of hogs a sliding-scale price was 
decided upon which varied with the price of corn according to 
a fixed ratio between quantity of corn and weight of hogs.' 

Another class of cases which required that the emphasis 
should be laid on the demand side consisted of those products 
in which allowance had to be made for difference in quality or 
grade. Douglas-fir logs, for example, were allowed differential 
prices according to length ; regardless of the cost, logs over 40 
feet long were priced according to the usual custom of the 
trade. Also, in the case of lumber the different prices placed 
on the different grades of boards bore little, if any, relation to 
cost. 

To sum up : While prices were generally fixed on the basis 
of cost, there were necessarily many exceptions. Sometimes 
no costs were available. Sometimes cost was only partly avail- 
able as a basis, as in the case of "joint products" and of pro- 
ducts for which complete cost data did not exist. Sometimes, 
again, no effort was made to use cost, as in the case of substi- 
tutes whose prices were fixed on the basis of the commodity in 
the place of which they might be used. In a few instances the 
price was fixed without regard to cost, merely on the basis of 
preexisting prices, such prices being taken for what was pre- 
sumably a normal period. 

Undoubtedly one limitation on price fixing on a cost basis 
lies in the difficulty of allowing for demand or quality. Under 
the Lever Act, for instance, prices for coal were based on cost, 
not on quality. And the Fuel Administration called attention 
to the fact that, for this reason, in returning to a peace basis 
there would necessarily have to be a readjustment. 

' The price of corn was not formally or publicly fixed. 



44 POLITICAL SCIENCE QUARTERLY 

5. Value of Materials vs. Cost 

The foregoing distinctions between cost and demand as bases 
for price fixing suggest another phase of this great problem. 
Whenever the question arose as to whether materials used in 
the manufacture of a given product should be taken into cost 
on the basis of their market value or the cost to produce them, 
a difference of opinion manifested itself. A notable illustration 
of this occurred in fixing the price of lumber. The lumber 
manufacturers insisted that their stumpage should be considered 
at its market value, which reflected the high war prices of 
lumber, while the Federal Trade Commission, in reporting 
costs to the Price Fixing Committee, endeavored to ascertain 
the actual cost to the lumber manufacturers of this jaw material. 

In order to understand this point it is necessary to bear in 
mind that the problem of the price-fixing agency is not merely 
to decide upon the reasonable price but also to insure that its 
decision will be observed. Its problem is made easier when 
the raw material involved in the production of any given com- 
modity is consumed by the producers at a uniform valuation, 
as this appears to make greater uniformity in cost. Naturally, 
too, it is easier to satisfy those in the industry when they are 
allowed to retain profits made on stocks of materials purchased 
during periods of advancing prices. The significance of these 
points is increased by the fact that those engaged in determin- 
ing the price fixing were often business men whose point of 
view seems to have been naturally sympathetic toward the 
easier and more " liberal" course. 

In the case of lumber, a sort of compromise was at first 
adopted, in that the charge made to cost for stumpage was 
somewhat greater than the actual cost of the stumpage to the 
lumber companies and somewhat less than the current market 
value. More or less consciously the policy was adopted in this 
case of charging the raw material in on the basis of its pre-war 
value, the idea being that the owners were entitled to appre- 
ciation in value which had accrued prior to the time that prices 
became subject to regulation. When, however, the Food Ad- 
ministration fixed the margins of dealers in cottonseed, it was 
stipulated that the margin was to be based on cost of material 



PRICE FIXING IN UNITED STA TES DURING THE WAR 45 

and not replacement value. Nevertheless, this same Food Ad- 
ministration through its Sugar Equalization Board adopted the 
extreme application of the value basis. In August, 1918, it 
was announced that the Sugar Equalization Board was to buy 
all sugar held by the refiners at the old crop price and to sell 
it back to the same refiners at the new price, thus equalizing 
costs and profits. The gain by the transaction was to be ab- 
sorbed by the Board, the government thus taking a speculative 
profit that would otherwise have gone to the refiners. This 
action may have been taken entirely on grounds of expediency 
connected with price fixing, but it is not improbable that the 
price of sugar was made somewhat higher as a result,' As 
time went on, disputes arose between representatives of the 
lumber industry and the government concerning the stumpage 
figure, and, both in this case and in the case of copper, the 
question was finally settled by making no charge for the raw 
material in cost but throwing it into the allowance for interest 
and profits. This was another compromise measure ; but it was 
one which, on the whole, worked in the interest of the govern- 
ment and toward a correct solution of the problem. Under 
this arrangement it was possible to compute exact operating 
costs without any allowance for " depletion " of timber or ore, 
just as costs had commonly been computed in the industry in 
normal times. Then the same margin could be added to the 
cost which had been obtained in normal times. This margin 
might be called the " net back to stumpage " or the " net back 
to ore in place" and included three items: (i) replacement 
for depletion of raw materials; (2) interest on invested capital; 
(3) profits of enterprise. 

As a matter of fact there are two rather clearly defined cases 
to be distinguished : One exists when a manufacturer buys his 
raw materials; the other when he secures his raw materials 
from sources which he owns. When he buys his materials at 
market rates, the market price is actual cost to him. More- 
over, he assumes a risk of fluctuation in market price which is 

• Not higher than it would have been without regulation. There can be little 
doubt that the activity of the Food Administration saved the sugar consumers of the 
United States millions of dollars, but more might have been saved. 



46 POLITICAL SCIENCE QUARTERLY 

necessary, for he is buying to meet his current needs. On the 
other handj when the manufacturer produces his own material, 
directly or indirectly, the market price generally is not his 
actual cost and may include a large element of profit to him. 
( I ) In fact, any valice which he may put upon the materials, 
other than their actual cost value, is entirely hypothetical. 
There has been no bo7ia fide sale. (2) The market value would 
be estimated on the basis of the high price of the finished pro- 
duct which is in question. (3) Moreover, the source of the 
materials may be assumed to be sufficient to supply the needs 
of the manufacturer for a long period and may be called a 
funded source. To allow the manufacturer to charge the ma- 
terials at market value, when that is in excess of cost, would be 
to " write up " or appreciate the value of a fixed asset and 
might lead to the vesting of such a valuation, which would tend 
to increase price and the profits of the manufacturer. (4) 
Finally, it is practically certain that few, if any, manufacturers 
would allow the rule to work both ways ; for they would not 
care to charge their materials into cost at less than the actual 
cost to produce them even if the market price should fall so 
low. 

The writer's conclusion is that the market value of materials 
may, without error, be charged into cost when such value is 
actually in continual process of becoming the cost of the manu- 
facturer. Thus, a cotton spinner must buy his supplies of 
cotton, and the price he pays represents cost to him, even 
though the price subsequently rises, and his materials inventory, 
therefore, increases in value. Sound price-fixing policy dic- 
tates that the current or anticipated cotton market be made the 
basis to which the manufacturer's conversion and selling costs 
will be added. On the other hand, when the manufacturer 
does not botia fide buy his materials but produces them directly 
or indirectly, the cost of production should be the basis, for 
value would not in this case equal cost, but cost plus profit. 
Naturally, if raw material is taken into cost at its market value, 
any investment in the supply thereof must be deducted from 
the total " investment" used as a basis of " return" above cost. 
Otherwise the producer is given interest and profit twice. 



PRICE FIXING IN UNITED STA TES DURING THE WAR 47 

The different degrees of integration existing in an industry 
have caused much confusion in the thought of those engaged 
in fixing prices.' But, to the writer's way of thinking, the 
question is merely one of competition between different kinds 
of business organization, each regarded as a competing unit. 
Whether a concern actually buys its raw materials or not, it is 
attempting to compete with all other concerns which make the 
same product, even though these other concerns own their raw 
material. If some companies buy their raw materials, while 
others produce their raw materials, the price on the given pro- 
duct must either be high enough to cover the cost of those who 
buy, or not. If the price is high enough, those who buy their 
materials are allowed to exist; if it is not high enough, they 
must either secure the advantages possessed by their competi- 
tors or go out of business. To take any other point of view 
would be to regard integrated concerns as disintegrated, in that 
their costs and profits would be regarded as split into as many 
stages as might be occupied by independent business units. It 
would, for example, treat the lumber manufacturer as though 
he were engaged in two separate and, perhaps, conflicting busi- 
nesses : (i) that of a speculator in timber; and (2) that of a 
manufacturer of lumber. 

In any event the non-integrated manufacturing company has 
a smaller investment per unit of finished product and should 
require a correspondingly smaller margin over cost to yield a 
given percentage of return to capital. 

6. Investment and Return on Investment 
Perhaps the chief difficulty of the price fixer in most cases 
concerned the allowance of fair return on investment. The first 
question which confronted him on this score was, what is the 
true investment? Here we again meet our old friend " cost vs. 
value". This phase of the matter was never satisfactorily dealt 
with by any price-fixing agency during the war. The Federal 
Trade Commission in connection with its cost findings fre- 
quently reported to the Price Fixing Committee of the War 

' See above, pp. 33-34. 



48 POLITICAL SCIENCE QUARTERLY 

Industries Board a figure representing the investment, but time 
did not permit the careful investigation that would have been 
necessary to ascertain the actual money invested, nor was the 
attitude of the price-fixing agency, as a rule, one which favored 
the strict construction of " investment". Indeed, this is but a 
larger aspect of the point already touched upon in connection 
with the depletion of mineral and timber lands. In general, it 
may be said that in a majority of the price-fixing operations of 
the War Industries Board, some consideration was given to the 
estimated investment and that in such cases the figure used was 
one which lay somewhere between the book value claimed by 
the companies concerned and the actual net investment made. 
This resulted from the fact that the investment was estimated 
in most cases by deducting from the sum of the stock, funded 
debt and surplus, any " outside " investments, good-will and re- 
serves for items covered in cost.' On the other hand, a major- 
ity of the price-fixing operations of such agencies as the Food 
Administration appear to have been made on the basis of a 
margin (interest and profits) per unit of product, determined, 
upon with reference to past experience. Of course, exceptions; 
exist to these statements. 

In cases in which the investment played an essential part, 
numerous questions arose, only two of which will be here re- 
ferred to. First, should the average investment be taken or 
should a marginal investment be used? The prevailing prac- 
tice appears to have been to use an average investment, though, 
in fact, the figures used were generally so liberal as virtually to 
constitute marginal figures. The use of the average investment 
is warranted on the assumption that it approximates the invest- 
ment necessary to produce efficiently a unit of the product con^ 
cerned. Inefficient or unwise investments are not entitled to 
the same rate of return as those which are economically justi- 
fied. Some companies hold enormous supplies of raw material 
for speculative purposes ; others have made investments which 
are too large, bringing their plants upon a basis which experi- 

^ E. g., " Reserve for depreciation ". The depreciation having been allowed in 
cost, and the price based on cost, no further allowance is necessary. 



PRICE FIXING IN UNITED STATES DURING THE WAR 



49 



ence has shown to be uneconomical. If the large investment 
does not result in a lower unit cost of production, the company 
of large investment must, under competition, take the results 
of a mistaken policy and accept a lower rate of return. The 
only fair price-fixing policy in this regard would appear to be 
one of ascertaining the investment necessary for the reasonably 
efficient operation of a plant for the purpose of making money. 

Sometimes a rate of investment per unit of product is gener- 
ally recognized in an industry, and such rates are sometimes 
used by banking firms as a basis of extending credit. Thus, in 
the cement industry most engineers would admit that before 
the war from $1.50 to $2.00 was sufficient investment per barrel 
of annual output; in the sulphuric acid industry, from $25.00 
to $27.50 per ton should have been adequate; and in the news- 
print paper industry, it appears to have been generally agreed 
that the reasonably efficient plant in the United States should 
not have an investment in excess of $25.00 per ton of daily 
capacity. Such figures represent a kind of average. The 
Federal Trade Commission in most cases found it feasible to 
ascertain the fair average investment per unit of output. 

Aside from the problems involved in ascertaining the true 
total net investment, the chief difficulties lay in the variations 
between capacity and actual output and in the necessity of 
sometimes distributing the investment among several different 
products. 

The second question concerning investment which will be 
specially referred to is that arising out of special war construc- 
tion. In not a few cases plants were built and mines opened 
up, which it was known would be of little or no value at the 
end of the war. On the whole, no clear policy appears to have 
been outlined by the price-fixing agencies with regard to the 
amortization of such investments. It is probable that in many 
cases a general allowance was made in the shape of a specially 
high price, with the feeling that the company concerned could 
take care of its investment out of the large margin which it 
would make. Such provision, however, is not business-like and 
may prove quite vicious. The correct policy would have been 
to allow the honest and efficient investments made specially for 



50 POLITICAL SCIENCE QUARTERLY 

war purposes to be written off during the probable period of 
the war, down to their scrap or alternative-use value. Of course, 
the original investment in such cases should be valued at cost. 

The next question which confronted the price-fixing agency 
was, what return shall be allowed upon the investment? In 
case the investment was a known quantity, this question reduced 
itself to a question of percentage. In case, however, the in- 
vestment was not known, some provision had to be made in the 
shape of a margin above cost to be allowed per unit of product 
sold. In either case, the price was generally made sufiEicient to 
allow a margin over the marginal cost, which would allow not 
only interest on the average investment, but a fair rate of profits 
to the enterprise. In attempting to reach such a margin, the 
price fixers could, and did, consider many things, among which 
may be mentioned the past margin and percentage on invest- 
ment received in the industry under consideration ; the percent- 
age of margin on sales taken together with the rate of " turn- 
over"; the risk involved; the need of stimulating production; 
the whole situation as to the range of costs, — as to whether the 
price under consideration would result in enormous profits 
to supra-marginal producers, or whether it would put out of 
business too large a portion of high-cost producers. 

In so far as the Price Fixing Committee of the War Indus- 
tries Board is concerned, the practice developed in cases in 
which the data were available of taking lo per cent, on the 
average investment as being a sufficient allowance above mar- 
ginal cost to cover interest and profits. No doubt, questions 
were raised as to whether it was necessary to make any allow- 
ance at all over marginal cost in addition to interest — say at 
5 per cent. ; but it is to be remembered that the prices fixed 
were generally maximum prices, and that with advancing costs 
and war conditions it was not deemed wise to shave too closely. 

In merchandising businesses the investment has little signifi- 
cance for price-fixing purposes. A broker, for example, may 
do a million dollars worth of business with a very small amount 
of capital, the chief factor in his business being his personal 
exertion and shrewdness. 

In abnormal periods of advancing costs and prices it may be 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 5 i 

well to consider the results carefully before attempting to fix 
prices by limiting margins to any certain percentage either on 
cost or on sales value. And the Food Administration probably 
did well in fixing a flat margin per barrel on flour. Neverthe- 
less, the 25 cents per barrel allowed in this case was too large 
and the actual margins earned were much greater than those 
probably anticipated.' 

A point which caused much misunderstanding and ill feeling 
was the relation of previous lean years to the margin of profit 
to be allowed by the price-fixing agency. Ordinarily, under 
competition, lean years and fat years offset one another, and 
the losses of the one are borne for the sake of the gains of the 
other. Not unnaturally, therefore, the representatives of the 
lumber and other industries urged that inasmuch as they suf- 
fered as a result of the European War, they should be treated 
liberally in the price fixing. To such arguments, however, the 
Price-Fixing Committee turned a deaf ear, their reply being 
that this government was not responsible for the war and could 
not undertake to insure industry against loss. The committee 
attached considerable weight to the rate of profits made during 
the years prior to the war. Clearly this stand was wise. No 
proof could be furnished that 191 7 or 191 8 were ordained to 
be fat years. Rather it would seem that our entrance into the 
war, like the proverbial " act of God ", brought about an inter- 
ruption in the normal course of events and postponed for a 
season the coming of the usual fat years. 

7. The Problem of more than One Price for the same Product; 

and Pooling 

One of the practical difficulties with which the government 
price fixers had to deal was the problem of buying from indi- 
vidual companies at individually determined prices. The Rail- 
way Administration would undoubtedly have been able to effect 
great economies by purchasing coal from companies whose low 
costs would enable them to sell more cheaply than the price 

' As a matter of fact, on account of taxes and penalties, neither the anticipated 
nor the actual margins could be known. 



52 POLITICAL SCIENCE QUARTERLY 

fixed for the public. There is evidence that it desired to do 
so but was restrained by the Fuel Administration's anxiety to 
maintain the market, — and with it, wages. 

If prices were fixed merely on goods purchased for gov- 
ernment account, and if the government purchase was a rela- 
tively small part of the total output of the industry, it was 
common to fix a different individual price on the output of 
each company. Under commandeer orders, and in a few other 
cases, the prices were fixed on the basis of individual costs or 
of fixing different costs for small groups of producers. This 
was the case with common brick, and later, at least, with sul- 
phuric acid. 

When, however, the purchases for the government were the 
dominant factor in the market, as in the case of copper, the 
tendency was to fix a single price on the basis of marginal cost. 
Here practically the entire business of the companies was con- 
cerned, and, accordingly, the total profit arising from superior 
efficiency was at stake. Various schemes were proposed for 
granting special prices to high-cost copper producers or for 
pooling the production but were not adopted. 

When a price to the public was involved, the problem was 
somewhat like that which confronted the government as the 
sole buyer, and sound price-fixing policy seemed to be to 
approximate what would take place in a competitive market. 
This meant a single price with differential profits to supra- 
marginal producers. Indeed, the possibility of making sepa- 
rate prices for the same kind of product, coming from different 
concerns, was limited by competitive and market conditions, 
as in the case of Michigan cement and Virginia-Carolina lumber, 

A pooling system was strongly urged in the case of steel 
rails, coal, and — in a modified form — of copper. It was not 
adopted, because pooling would have involved the organization 
of considerable machinery for administration as well as consid- 
erable risk through the accumulation of stocks. In any case, 
too, the plan would have necessitated not only the careful ascer- 
tainment of the cost and the investment of each producer but 
the fixing of a separate price for each, which would have 
multiplied the work of price fixing. The trouble experienced 



PRICE FIXING IN UNITED STATES DURING THE WAR 



53 



by the Food Administration in attempting to regulate flour 
prices on a cost-plus-profit basis illustrates this difficulty. 

Pooling, however, was undertaken in several cases in which 
the object was not so much to equalize profits as to ration or to 
control the distribution of the product. This was true of raw 
sugar, wool and tin ; and the guarantee of a minimum price for 
wheat constituted a potential pooling arrangement. In these 
cases, the producers were paid the same price and allowed to 
retain any differential profits resulting therefrom, the govern- 
ment merely undertaking to supply the needs of the country 
at reasonable prices. Nevertheless, while in these cases the 
price fixing was not complicated by dealing separately with 
each producer, the administration was difficult, and above all 
the government was financially involved in an unfortunate mis- 
take, e. g., in wheat, tin and wool. 



54 POLITICAL SCIENCE QUARTERLY 



IIP 

I. Chief Purposes in Price Fixing 

PRICE fixing ill the United States was almost entirely the 
product of war conditions. In general, there were three 
chief purposes in fixing prices: (i) to secure produc- 
tion of needed commodities; (2) to prevent social unrest by 
checking profiteering, coordinating food prices and wages and 
stabilizing industrial conditions; (3) to assure government 
economy, both in buying munitions and in a fiscal sense. 

In order to appraise the measure of success and the results of 
the price-fixing program, it is desirable to present a more de- 
tailed statement of the purposes of the price fixers. The con- 
trol of output may be regarded as the first of these purposes. 
This may have been the result of a desire either to stimulate 
the production of war necessities or to check the production of 

' Supplementing the (irst installment of this article, puMisheii in the March issue of 
the Political Science Quarterly, the following facts, which have come to the 
writer's attention, are worthy of presentation: 

(i) The price of silver was fixed by Congressional act of April 28, 1918, which, 
in dealing with monetary problems, provided for the stabilization of the prices and 
the encouragement of the production of silver. The act provided for the melting of 
350,000,000 silver dollars and the sale of the bullion at $i.oo per fine ounce, and 
for the purchase of an equivalent quantity of silver from the mines and reduction 
works of the United Slates at $1.00 per ounce. As a result the price rose to ap- 
proximately $1.00. This amounted to an indirect fixing of a minimum price. 

(2) The Food Administration, about February, 1918, fixed a price of 9' per 
pound for arsenic. This was done by agreement with the producers, who stated 
that the price woul^ yield a fair profit. The price of arsenic had risen from 4^ be- 
fore the war to 15' in Februar}-, 19 18. 

(3) The price of ferromanganese was fixed for the 70% grade by informal 
agreement at $250 delivered. 

(4) The prices of several chemicals were " fixed ", chiefly for government purchase, 
among them being the following: Carbon tetrachloride, liquid chlorine gas (y^**). 
phenol (28''' per lb.), picric acid, and formaldehyde (i6^<' lb.). 

(5) The price of toluol was fixed at $1.50-1.55 per gal. 

(6) The War Industry Board, in June, 1918, announced to the naval stores in- 
dustries that the advance in prices of rosin and turpentine would have to cease. 

(7) The Council of National Defense, in May, 1917, by agreement with the lead- 
ing packers, "pegged " the price of hides for government requirements at the ex- 
isting market rate. 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 55 

unessential commodities. Its immediate expression, however, 
was found in the attitude toward profits. Oil the one hand, the 
price fixers sought to keep profits up in order to stimulate pro- 
duction, as in the case of timbers, iron, steel and crude oil. On 
the other hand, they sometimes sought to keep profits down in 
order to prevent the undue expansion of luxuries. 

The prevention of profiteering was a second purpose, back of 
which lay the desire to allay social unrest. This found expres- 
sion in such regulation as that of wool prices, the excessive ad- 
vance of which was due to speculation in a market that was 
hysterical and artificial. 

A third purpose was to control wages. In some cases, where 
the object was to keep wages up, this found expression in a 
number of price-fixing agreements, as in the case of copper and 
coal, which contained clauses providing that no reduction in 
wages should be made. It will be remembered that a labor 
representative was a member of the Price-Fixing Committee, 
and wage questions were in some cases brought before the 
committee as a factor in the price situation. The wages which 
it was desired to maintain were " real wages ". In fact, a dis- 
tinct purpose may be said to lie in the desire to keep " money 
wages " down. Mr. Hoover stated before a Harvard Universit>' 
audience that our entrance into the war had raised the question 
of controlling our food so as to reduce prices, " for", he said, 
" unless we can do so, we must meet a raise of wages with all 
its vicious circle of social disruption". Mr. Hoover is re- 
ported to have said also that " the high cost of living must 
stop, or we must have a continuous ascending wage scale; a 
continuous increase in wages usually undermines national effici- 
ency". While these \^o purposes with regard to wages may 
be, in part, harmonized, it must be concluded that they are, in 
part, conflicting. 

Another distinct purpose was to improve the government's 
financial situation. This purpose again may be divided into 
two : ( I ) to keep government borrowing and taxation down 
(z) by reducing profits made by producers and (b) by preven- 
ting inflation in prices, thus reducing the government's expen- 
diture ; and (2) by increasing the source of taxation from in- 



56 POLITICAL SCIENCE QUARTERLY 

comes and excess profits. Here again a conflict will be noticed. 
Taxes might be increased by increasing profits ; but if profits 
should be increased, the price which the government, as a pur- 
chaser, would have to pay, would also be increased. 

Perhaps a distinct class of cases may be recognized, in which 
the motive, was to " stabilize " the market. On the whole, the 
cases of so-called stabilization were closely akin to those in 
which the object was to "stimulate" production, as they were 
directed partly toward helping the industry concerned or toward 
preventing a decrease in values when the government had be- 
come the holder of a stock of goods through some pooling 
arrangement or otherwise. Thus the price of hollow building 
tile was fixed, and orders were distributed, partly with the idea 
of keeping the plants alive ; and the stabilization idea was also 
applied to the cement industry. This did not necessarily mean 
high prices, for hollow building tile in the commercial market 
brought from two to four dollars per ton more than the gov- 
ernment price. " Stabilization" in different cases and in differ- 
ent proportions involved : ( i ) the equalization of prices be- 
tween different territories {e.g., cement), different products 
{e. g., cottonseed products) and different producers (^. g., 
mid-continent crude oil) ; (2) the prevention of considerable 
change in price, up or down, {e.g., wheat and silver) ; and (3) 
the prevention of decreases in prices, either generally or in 
particular cases {e.g., hogs). 

The idea of allaying social unrest appears in the purposes of 
keeping " real wages " up, preventing profiteering and reducing 
government expenses. 

From another point of view, the whole price-regulating mech- 
anism was a part of the necessary machinery for the distribu- 
tion of those necessaries which had become so scarce as to be 
insufficient to gratify the usual wants of the nation. This can 
be illustrated by sugar and sulphur. In other words, prices 
were regulated in order to have some fair valuation take the 
place of normal, competitive conditions which had been lost for 
one reason or another. This is the strongest way to put the 
case in favor of price fixing. In some instances, the government 
had to buy practically the entire available supply, as was the 



PRICE FIXING IN UNITED STATES DURING THE WAR 57 

case with copper. Wherever unified buying on a large scale 
was necessary, price fixing was called for, since such unified 
buying virtually amounted to commandeering. Certainly when 
there is no competition among buyers an abnormal condition 
exists. Moreover, in some cases, the existence of sellers' monop- 
olies was recognized, and partly on this ground the price of sul- 
phur, nickel and aluminum was regulated. When the market 
was so affected by panic and speculation as to be highly ab- 
normal, this same result followed. An interesting case is 
furnished by the wool market in 1917 and 1918. There was 
no shortage in the supply of wool, and consumption in 191 8 
was little, if at all, greater, than in 191 7. Nevertheless, there 
was an extraordinary advance in price, due to ignorance and to 
speculative conditions ; and abnormal stocks, of both wool and 
cloth, were carried by the manufacturers. Under such circum- 
stances price fixing was perhaps needed. 

The relation between price fixing and control over the con- 
ditions of demand and supply is close and important. If prices 
are fixed, it may be necessary to control the demand or the 
supply or both. A low price on sulphur would have invited 
non-essential uses. The high guaranteed price on tin required 
a limit of importation. On the other hand, if either demand 
or supply or both are controlled, it may be necessary to fix 
prices. For example, the price of rubber was fixed as an inci- 
dent to a control over shipping and imports. When the govern- 
ment took all of the product, like platinum, or restricted output 
or controlled priorities, it was natural also to fix the price. It 
is interesting to note that no appreciable traces can be found of a 
purpose to control the consumption or demand through price 
regulation. Prices were not made high to check consumption, 
nor were they made low to increase the volume of business and 
thus decrease cost of production. Apparently, as to the reaction 
of price on industry, prices were fixed with regard to produc- 
tion and supply and were not used as they might have been, 
as a dynamic factor in the molding of individual demand curves. 



58 POLITICAL SCIENCE QUARTERLY 

2. Results Obtained from the Price-Fixing Program 
The stimulation of production was one of the chief purposes 
in fixing prices. And this purpose was frequently realized. 
Ship timbers were secured in great quantities ; manganese ore 
was developed in a way that would have seemed impossible a 
few years before ; and supplies of quicksilver, copper, steel and 
crude oil sprang from the ground as if by magic. The magic 
was the lure of high profits which resulted from high prices. 
Indeed, it was relatively easy for the government to get results 
when the object was to stimulate production by high prices, and 
the greatest measure of success was secured in this way. 

The somewhat conflicting object of securing lower prices in 
order to prevent social unrest, profiteering etc., was not so easy 
to attain. Some substantial reductions were obtained, however, 
notably on wool, sugar, sulphuric acid and coal, all of which 
are important products from the point of view both of war muni- 
tions and of civilian cost of living. The price of flour, too, 
while higher than necessary, was by regulation made appreciably 
lower than it otherwise would have been. In the case of sugar, 
during 191 6-17, and before government regulation, the price 
had risen greatly and beyond any justification by increased 
cost. The Tariff Commission found that the average proportion 
of the total output of sugar, which was produced at a profit, 
was about 87 per cent. In 1916-17, however, the figure had 
increased to 99 per cent. Then came price regulation, and the 
Commission found that the total output protected from loss by 
the Food Administration price was reduced to a little over 89 
per cent. This was in spite of the fact that the same forces were 
at work in 19 1 7-1 8 as had caused the rise in 19 16— 17. Although 
the Tariff Commission's figures are not entirely conclusive, for 
the reason that there may have been a larger number of inefficient 
high-cost producers in the business in 191 7-1 8 than in the pre- 
vious year, and that the companies in the two years were not 
identical, it seems fair, nevertheless, to conclude that consider- 
able results in the way of checking profiteering were secured in 
this case. 

On the whole, it is our well-considered opinion that profi- 
teering, while it existed in 19 18, was appreciably less excessive 



PRICE FIXING IN UNITED STATES DURING THE WAR 



59 



than in 191 7, — a year of extraordinary profits.' In part, this 
fact was due to increased costs and to adjustments in produc- 
tion and consumption ; but in part — in the basic, controlled in- 
dustries — it was due to price regulation. The fixing of prices 
did not prevent or abolish profiteering; it somewhat moderated 
the evil. 

As to the reduction of the output of unessential products, 
we know of no case in which this was effectively accomplished 
by price regulation. Through control of priorities and the lure 
of cost-plus contracts in other fields the end was attained but 
not by reducing prices. 

There can be little doubt that price fixing helped to raise 
wages and to keep them up. Indeed, great anxiety was dis- 
played by the government lest wages might be reduced. The 
insidious cost-plus plan caused the rapid bidding-up of labor, 
and prices and rates were adjusted to the new wage levels. 
This sanctioned high wages. We have been unable to find any 
■cases in which money wages were reduced or kept down. 

It would be hard to say how important a part the desire to 
stabilize industrial conditions played in the fixing of prices, but 
it is certain that this was one of the beneficial results. In a 
period like that which attended the declaration of war by the 
United States, there are apt to be extreme reactions in the 



'The following statement, compiled from Sen. Doc. No. 248, 65 Cong., 2 Sess., 
is believed to be fairly representative of the percentage of net earnings to invest- 
ment : 



Year 


U, S. Steel 
Co. 


48 

Lumber 

Cos. 


106 
Oil Cos. 


21 

Copper 
Cos. 


20 

Bituminous 

Coal 

Cos. 


"Bigs" 
Meat Packers 


1913 
1914 
1915 
1916 
1917 


2.8% 

5.2% 

15.6% 

24.9% 


5-2% 

17-0% 


15%' 

2I%» 


11.7% 
24.4% 


20 f^ 
90 f" 


6.2- 7.3%" 
16.8-26.7% 



* — approximate. 

'' — margin per ton. 

' — Average for 1912-1914. 



60 POLITICAL SCIENCE QUARTERLY 

market, accompanied by all degrees of panic and speculation. 
The fixing of maximum prices may prevent extreme advances 
and thus avoid such violent reactions as took place in the com- 
mon zinc industry. In this industry it was found that in the 
latter part of 191 7, no price regulation was required, for the 
reason that the market price was less than the cost of produc- 
tion, a condition that was the direct result of the extremely 
high prices which had prevailed a few months previously. The 
high prices had stimulated production to such an extent that 
the capacity was in excess of the quantity demanded, and ex- 
treme depression followed. When times are more normal, it 
may be satisfactory to allow price changes to work out adjust- 
ments between quantity demanded and output; but in such 
conditions as existed during the war, it is our opinion that the 
fixing of maximum prices, if wisely done, is beneficial. It 
seems clear that this conclusion is illustrated by the case of 
grade A zinc. Had the price not been fixed, there can be no 
question but that there would have been a rush to increase 
the output, with results which would have been similar in kind 
to those which occurred in the case of common spelter. We 
know of several companies which were considering going into 
the field but were deterred by the fact that a maximum price 
was fixed. Much the same may be said of zinc sheets and 
plates and of sulphuric acid. The lumber industry also would 
undoubtedly have undergone a condition of severe depression, 
had prices been allowed to take the course which the more 
short-sighted representatives of the industry desired them to 
take. 

Of course, the foregoing applies only to those cases in which 
the prices would have gone higher than the maximum fixed. 
It is undoubtedly true that in a few cases, at least, the fixing of 
a maximum price became the means by which prices were 
maintained at or near the maximum, which would otherwise 
have remained at lower levels, or at least, would have done so 
if effective competition had existed. In our opinion, this is true 
at least of crude petroleum and certain canned vegetables. 
Moreover, toward the close of the price-fixing period, the Price- 
Fixing Committee authorized copper producers to maintain a 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 6 1 

price of 26 cents, — if they could, — a fact which probably served 
to delay somewhat the subsequent drop. 

Closely connected with the foregoing results was the moder- 
ation of social unrest, which the price-fixing program insured. 
While it is impossible to measure such a result, there can be no 
reasonable doubt that the very fact that " something was being 
done " tended to allay the discontent and suspicion which ad- 
vances in prices and rumors of profiteering had caused to spring 
up in the public mind, and the real achievement made in moder- 
ating price advances in the case of such commodities as sugar, 
wool and coal, at least tended to offset the effect of apparently 
unchecked increases in the prices of cotton, shoes and meats. 
It may also be surmised that the degree of stabilization insured 
by the price-fixing program was an important factor in this 
regard. 

The foregoing results were, on the whole, direct, tangible and 
good. Certain other good results were tangible but incidental. 
For example, appreciable economies were secured in the distri- 
bution of several important commodities, notably coal. By a 
system of zoning, unnecessary transportation was avoided. 
Moreover, in the operation of railways much of the wastes 
through competition in service were eliminated, although it 
seems probable that at the same time the service deteriorated. 
Production was made more economical in several industries, as 
is illustrated by the saving of waste in threshing wheat and by 
the adoption of devices for recovering potash from the process 
of making Portland cement. 

One of the chief incidental advantages was the introduction 
of cost-accounting methods in numerous industries. When it 
became necessary to base prices or profits upon an exact knowl- 
edge of the cost of production, the much vaunted efficiency of 
American business was frequently put in a bad light. The 
Federal Trade Commission found that in few industries was it 
possible to ascertain exact costs, except by long and difificult 
labor. The lumber industry furnishes a good example of one 
which took advantage of the situation to encourage the intro- 
duction of cost-accounting methods. To the extent that Amer- 
ican business men were induced to ascertain their costs more 
efficiently by the war, a notably good result was secured. 



62 POLITICAL SCIENCE QUARTERLY 

Certain intangible advantages may be mentioned here, al- 
though it is impossible to measure them. Among the chief of 
these was the introduction of a spirit of practical patriotism. 
The business men of the nation were forced to partake in what 
may be called " social team work ", and at least to act as though 
they were taking a social point of view. Common dangers, 
common wants, common regulations, inducing common action, 
were bound to bear fruit. This found expression in the regu- 
lations adopted by the various administrative bodies at Wash- 
ington, such as zone prices and distribution, the stimulation of 
production according to needs, the checking of production of 
things not necessary {e. g., alcohol), the recognition of the 
principle of a "living wage", the prevention of speculation, 
hoarding, undesirable reselling etc. and the equalization of sup- 
ply {^e. g., sugar). To the extent that the adoption of these 
measures resulted in a real education of those affected, great 
permanent good was accomplished. 

It must be observed, however, that the regulations just re- 
ferred to were sometimes warped by the acts of the officials 
who enforced them and were not infrequently evaded. More- 
over, they were to some extent offset by the stimulus given to 
organizations for private gain. One of the most notable results 
of war-time conditions, which was encouraged by price regula- 
tion, was the rapid growth of labor organizations, farmers' 
organizations and business associations. However desirable 
these may have been for some purposes, it would have been 
better if they had had a more normal growth. Under war 
conditions, too, the trade associations were able to go to great 
lengths in restricting competition and controlling prices. The 
result of this has been the establishment of a gild-like organiza- 
tion of industry which may utterly change the competitive 
system. Hardly an industry of any importance can be named 
in which an association was not either created or strengthened 
as a result of the price-fixing activities of the government, and 
in bargaining with the price-fixing agencies selfish interests 
were frequently aroused and made effective. By inducing 
clashes between the interests of particular industries and those 
of the government, forces tending toward social solidarity were, 
in part, counteracted. 



FRICE FIXING IN UNITED ST A TES DURING THE WAR 63 

Moreover, several infant industries were created with the re- 
sult that selfish interests were called into play. The war stimu- 
lated such industries as those concerned with manganese, 
chrome, magnesite, tungsten and potash, some of which are now 
insisting upon protection by the government. The attitude of 
wheat and cotton farmers, too, has not been an entirely healthy 
one. 

These forces tending to counteract social solidarity suggest 
some of the bad results of price regulation. Probably first 
among these should be mentioned the perversion of the forces 
which determine the margin of production, with the result that 
the weeding-out process in industry was seriously retarded. In 
several important industries the marginal cost, upon which 
the price was based, was the cost of an inefficient concern ; 
and prices were fixed so high that concerns which under nor- 
mal conditions, could not have survived competition, were en-,- 
couraged. Moreover, the unnecessary utilization of inferior 
supplies of raw materials and inefficient means of production, 
was made possible. In the copper and lumber industries, not 
only were high-cost mines and mills protected, but they were 
enabled to take advantage of the situation by exploiting low- 
grade ores and inferior tracts of timber. And cases were not 
rare in which companies resorted to inferior sources of supply 
in order to show high costs. At best, price fixing tends to take 
costs for granted and to prevent that struggle for survival among 
different methods and sources of supply which is so important 
in leading to efficiency in production. A more perfect price- 
regulating mechanism might have minimized this tendency, 
but to some extent it is an evil inherent in any price regulation. 

Another bad result of price fixing was over-capitalization. 
This would necessarily have attended the advance in prices 
caused by inflation. The point, however, is that by fixing 
prices under such conditions, there was a tendency to recog- 
nize and perpetuate over-capitalization, a tendency further en- 
couraged by rulings of the Treasury Department which recog- 
nized appreciated values set up for such assets as ore and timber. 
In our judgment, when the volume of the circulating mediuni' 
or the value of the standard money unit comes to be reduced, 



64 POLITICAL SCIENCE QUARTERLY 

this evil result of price fixing, by making readjustment difficult, , 
will be apt to cause an industrial strain and perhaps even z/ 
severe crisis. 

In some cases, price fixing resulted in such lack of economy 
that the average price paid by the government was probably 
higher than would otherwise have been the case. The adoption 
of the " cost-plus" idea, by eliminating risk from the producers' 
calculations, promoted inefficiency. Unnecessarily high wages 
made for labor inefficiency. Price fixing was used to sanction 
non-competitive prices at higher levels than conditions of de- 
mand and supply would have warranted. The manufacturers of 
cement, for instance, came before the Price-Fixing Committee 
with extravagant claims based on cost figures. Nor were they 
the only ones. In such cases the tendency was to " split the 
difference ". It was common for associations and committees 
representing them to line up in demanding a certain price and 
then to maintain the price sanctioned by the price-fixing 
agencies. 

It is probable that discriminations were involuntarily made 
among different industries. Indeed, it would be strange if there 
had not been some results of this sort, for no body of men can 
be sufficiently wise and well informed to prevent their holding 
some prices down to lower levels than others, especially in the 
face of the operation of a general force like that of inflation. 

Of course, evasion of price-fixing regulations reduced some- 
what both the good and the evil results. Professor Warren," of 
Cornell University, who has studied the price fixing of grain and 
grain products, maintains that such regulation was ineffective 
in many cases and that by combination sales and by mixing 
with other feeds, a price higher than that fixed was often 
charged. Certainly the control of flour prices by the Food 
Administration through the regulation of margins, was partly 
ineffective; and the provision for limiting the profits of the big 
meat packers to 9 per cent, proved entirely futile, their* profits 
being over 20 per cent, on investment in 191 7 and a similar 
percentage in 191 8. On other commodities, sales were made 
to individuals, who falsely claimed to be government contrac- 
tors, and frequently when the price was fixed for the govern- 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 65 

ment only, a virtual evasion was accomplished through sales at 
the unregulated public prices to persons who were indirectly- 
producing for the government. 

At the end of the war, it became apparent that in not a few 
important cases prices had been fixed at levels which were 
higher than was necessary. It is a striking fact that in the 
arguments published by the Industrial Board, Mr. Redfield 
sanctioned the conclusion that prices during the war had been, 
on the whole, " fixed " at too high a level. Certainly this opin- 
ion was heartily agreed to by the Railway Administration — at 
least in the case of steel products. It became apparent that 
costs and scarcity had both been exaggerated, while on the 
other hand, over-zealous or over-cautious government officials 
had made unnecessarily large purchases. There was much 
concern in some quarters about a probable drop in prices, and 
steps were taken to prevent it. The Copper Producers' Com- 
mittee appeared at Washington and asked for protection. The 
Iron and Steel Institute requested a continuation of price regu- 
lation. In fact, on November 15, 191 8, an agreement was 
made between the copper producers and the War Industries 
Board, which amounted to saying that the government would 
continue to pay 26 cents per pound for the copper for which it 
had contracted, and that it would sanction the continuation of 
the prevaiHng understanding among the producers, according 
to which they might concertedly demand 26 cents per pound. 

Other illustrations of the situation may be mentioned as fol- 
lows: In November, the committee on cotton distribution or- 
dered that there should be no short selling in the cotton 
exchanges at New York and New Orleans. In December, the 
War Department announced that army stocks of materials 
would be sold gradually, so as not to break the market. Early 
in 19 19, it became apparent not only that there had been no 
scarcity of tin in the United States when the Inter-Allied Tin 
Control became effective, but that there was a large surplus. 
The manganese ore price proved to be so high that the market 
became over-stocked in the latter part of 191 8, and buyers re- 
fused to consider offerings at the established prices. As has 
been pointed out in an earlier article of this series, it proved 



66 POLITICAL SCIENCE QUARTERLY 

difficult to keep up the prices on various cottonseed oil pro- 
ducts. Partly as a result of the open winter of 19 17-18, it was 
found that in the fall of 191 8 there was a surplus of coal, and 
the mines were called upon for light production. Even in the 
case of steel, there was, as a matter of fact, a good supply, and 
at the end of the war neither the railways nor the mines had to 
rush into the market for large quantities. It seems that those 
in charge of the shipbuilding program and of the ordering of 
steel for the Navy and for France, constantly insisted on steel 
shipments much in excess of current needs, which resulted in 
an accumulation of that product. 

It cannot be denied that it was well to play safe and to allow 
for a possible continuation of the war. Also, by economical 
methods, considerable savings in consumption were effected. 
Nevertheless, it is our conclusion that the prices of several im- 
portant regulated commodities were probably somewhat too 
high at the time the armistice was signed. It may be that the 
Engineering and Mining Journal put the matter too strongly 
when it said, " Junior officials, without any thoughtful estimates 
of military consumption, bought recklessly of goods produced 
by labor at a fantastic wage scale " (Feb. i, 19 19) and that the 
armistice found the United States overbought in nearly every 
commodity. While^there was probably something of this sort, 
we would emphasize, as the seat of the trouble, the fact that in 
fixing prices inefficient producers were kept alive by accepting 
an unduly high marginal cost. 

3. Criticism of the Chief Price-Fixing Agencies 

The work of the Price-Fixing Committee of the War Indus- 
tries Board was in the main a *' trading proposition". While 
considerable pressure could be, and in some cases was, brought 
to bear upon an industry, there was generally an effort to reach 
an agreement, in which considerable bargaining was used. The 
Price-Fixing Committee knew that the government must depend 
upon the cooperation of the industry in order to prevent evasion 
and to secure the service which was so important. The industry 
knew that the Price-Fixing Committee had great power through 
control of priorities and of public opinion. Various factors 



PRICE FIXING IN UNITED ST A TES DURING THE WAP ^y 

affected the situation as the different bargains were driven. 
Sometimes a particular government department, such as the 
Navy, was immediately interested in securing a lower price, and 
then the tendency was for the Price-Fixing Committee to drive 
a sharper bargain. If there was considerable public interest in 
the price, the article concerned being of wide, general use, the 
same tendency existed. If the quantity involved was small, no 
great part of the total output being concerned, it was easy to 
reach an agreement, and in such cases concessions were some- 
times made to the government, while in others, possibly the 
government did not make so careful an investigation or attempt 
to ascertain accurately the lowest possible price. One of the 
most important factors in the bargaining was the degree of or- 
ganization of the producers. Those industries which presented 
their cases before the Price-Fixing Committee through a well 
organized committee, or even a single individual, were apt to 
secure better results from their point of view. This is well 
illustrated by the fact that the Southern Pine Association 
secured prices which were not so close to cost as were those 
secured by the relatively unorganized representatives of the 
western logging and lumber companies. Finally, the practica- 
bility of commandeering the plants of the producers played an 
important part. When the Price-Fixing Committee knew that 
there were thousands of small plants, it felt that its dependence 
upon the good will and cooperation of the industry was greater 
than in other cases where government operation was more prac- 
ticable. An extreme illustration of this occurred in the re- 
luctance of the Price-Fixing Committee to take up the matter 
of wholesale and retail prices on such commodities as lumber. 
A large part of the work of the Price-Fixing Committee of the 
War Industries Board was in effect equivalent to giving repre- 
sentatives of the industry concerned considerable authority to 
get together and agree upon a price which would insure profit to 
most of the producers. A maximum price was named, and 
those engaged in the industry then lined up and charged the 
maximum price. Witness the situation in copper, cement and 
steel. 



68 POLITICAL SCIENCE QUARTERLY 

Naturally enough, with this condition of bargaining and 
" agreed " maximum prices, the prices of certain things were 
fixed too high. This sometimes occurred for the reason that 
the price was named as a mere maximum, while in reality it 
was also a minimum. But the chief trouble was that the mar- 
ginal cost was too liberally construed. Generally it included 
large salaries for officers and directors (containing an element 
of profit), as well as liberal allowances for the replacement of 
raw materials owned on the basis of market value. Generally, 
too, the risk of loss was largely removed by the price-fixing 
operation, — aside from an uncertain future element owing to 
doubt as to the duration of the war. Above all, a profit was 
allowed to the marginal company, for there was added to the 
marginal cost an allowance of lO per cent, on investment, con- 
siderably more than interest. A marginal company, under 
competition, gets no differential profit; the efficiency differential 
is secured by low-cost companies only. To add to all this, the 
lO per cent, allowance was generally figured on a capital invest- 
ment which was in excess of the true net investment. Indeed, 
the investment was not determined at all in some cases. It is 
no wonder, therefore, that prices were fixed at too high a level. 
This found expression in the utilization of inferior natural re- 
sources by many companies. 

Surely there is some limit to the justification of profits on the 
ground of marginal cost. Take any case in which there is 
known to be profiteering. If no limit is to be placed upon mar- 
ginal cost, it would only be necessary to start up some extremely 
inefficient plant in order to obscure the whole situation. Good 
work was done by the Price-Fixing Committee in eliminating 
from consideration abnormal plants or companies, but in our 
judgment not enough of this was done. In determining the 
margin, the proportion of the total product produced at a cost 
above the marginal cost should be considered, together with 
the history and efficiency of such submarginal operations and 
also the possibility of securing the total necessary supply from 
supramarginal companies. In a word, the agencies acting for 
the government should have exhausted every effort to secure 
as much as possible of the necessary supply from low-cost 
companies and to that end should have brought more pressure 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 69 

to bear by refusing to consider small high-cost companies 
and by demanding the maximum output from low-cost com- 
panies. 

The policy of " stabilizing ", which is closely related to the 
vicious idea of " keeping business as usual ", tended to keep the 
inefficient alive, thus guaranteeing higher and higher differentials 
in industries which required no stimulation, (^e.g. lumber and 
cement). This made the consumer carry the burden of the 
overhead expenses of unnecessary plants and prevented the 
concentration of the factors of production at points where they 
would be most effective. 

The failure of regulation to hold prices to a closer relation to 
cost, enabled the accumulation of enormous surpluses or re- 
serves in the hands of powerful low-cost companies. These 
they can use to tide over lean years during which weaker com- 
panies will fail. It would possibly have been a kinder and more 
wholesome policy to have used the knife more freely. 

A large part of the activity of the business men who repre- 
sented the War Industries Board in its price control, was un- 
consciously directed toward protecting the industry against what 
they believed to be drastic regulation and demoralization. Im- 
mediately upon the signing of the armistice, these men felt 
greatly relieved and proceeded to various points on the coast 
of Florida. This helps to explain why the Industries Board 
disbanded so promptly without taking steps to regulate prices 
during the transition period. One cannot but wonder why, if 
price regulation was regarded as a good thing and had been 
well done, it should have been dropped so incontinently. The 
period of transition to peace was a dehcate one in which the 
stabilization of prices was desirable. The conditions existing 
in October, November and December, 19 18, were as much war 
conditions as those which had existed in July, August and Sep- 
tember. Why, then, did the War Industries Board practically 
cease to function? 

We shall not undertake to criticise the work of the Fuel Ad- 
ministration on coal prices further than to say that in our judg- 
ment, the chief error lay in the precipitous attempt to fix prices 
at the beginning without sufficiently detailed information as to 



yo POLITICAL SCIENCE QUARTERLY 

cost. This resulted in fixing uniform prices for large areas 
within which conditions differed widely. As time went on the 
work was more and more carefully done. A few words should 
be said, however, concerning the work of the Oil Division of the 
Fuel Administration. This furnished an illustration of unusu- 
ally close cooperation between the industry and the government, 
and its operations were controlled by men who were personally 
interested in the industry. Certainly, its work was effective in 
securing the needed supply of products, which was the chief 
end to be accomplished. It is a fair question, however, whether 
the same quantity of oil could not have been secured at less cost 
to the government and the people. The last advance in crude 
oil prices was, in our opinion, entirely uncalled for, and this 
opinion is shared by many oil producers. Indeed, the advance 
was not made as large as that which the Oil Division had orig- 
inally intended. The principal factor in oil scarcity was not the 
price but a shortage in equipment and transportation. It is our 
opinion also that the figures given out by the Oil Division did 
not always convey a correct impression. For example, the 
same argument for " gasless Sundays " that was made in 191 8 
could have been made in any year from 1914 to date, as it is 
always the case that surplus stocks of gasoline are accumulated 
from December to April, and that such stocks thereafter decline 
until the fall months, when the refineries run practically from 
hand to mouth. Moreover, it is doubtful if the figures showing 
a great decrease in crude oil storage after June, 191 8, can be 
justified, a sudden decrease of approximately three million bar- 
rels being indicated which cannot be explained by the export 
figures. Finally, the public was led to believe that the stationary 
price of gasoline was an achievement, while as a matter of fact, 
to hold gasoline prices up at the same time that the prices of 
fuel oil and lubricating oil were greatly increased, was virtually 
equivalent to advancing the price of gasoline. The oil industry, 
with the exception of cotton, was the one great basic industry 
of the country for which there was virtually no price regulation. 
This was the achievement ! 

With regard to the Food Administration, it must be said in 
advance that the problem was peculiarly difficult, as it involved 



PRICE FIXING IN UNITED STATES DURING THE WAR 71 

prices to the consumer, and almost every case was one in which 
there were substitutes. Nevertheless, as long as the attempt 
was made, it must be judged, and it is a fact that the Food Ad- 
ministration's price regulation illustrates too many of the evils 
of the so-called " cost-plus basis". The attempt was made to 
regulate margins, and, especially as fixed margins were named, 
much manipulation of accounts was invited. Little was done, 
however, to determine costs. The object was, largely, to im- 
press the public and to allay social unrest. Prices were agreed 
upon at conferences between groups of interrelated industries 
and were fixed on a rough and ready basis, dependence being 
placed upon what had been the usual return in the past. Any 
one, will look into the results of price regulation in the case of 
flour and canned goods (vegetables, fruits and milk) will find 
how unsatisfactory the results were. In the case of canned 
milk, for example, the price of raw milk was not fixed. Manu- 
facturing costs were not checked. At one time, as high as 50 
cents per case of "tails" was allowed. The price of interre- 
lated products was not controlled, as a result of which cheese 
makers could not afford to pay the price for milk that the con- 
densers could pay. 

On the whole, it may be said that price fixing in the United 
States suffered fl-om the lack of a program. No adequate study 
was made of interrelations between commodities or of the var- 
ious complicated factors affecting demand and supply. No 
general principles were formulated. Too frequently, each step 
was taken up as a separate proposition. Much trouble would 
have been saved by a better understanding among the different 
price-fixing agencies and by the adoption of certain broad funda- 
mental principles, such as the basis for determining marginal cost 
("the bulk line figure") and the basis for determining investment. 

There should have been a general board of strategy to super- 
vise the entire price-fixing program and to coordinate it with 
the government's fiscal arrangements and with the various steps 
taken to control production and consumption through priorities 
and rationing. Some progress was made in this direction, as 
has been pointed out in a preceding installment of this article.' 

' See above, pp. I4-17. 



72 POLITICAL SCIENCE QUARTERLY 

But it remains true that the price-fixing operations were not 
sufficiently correlated with taxation and borrowing (inflation) 
on the one hand, and with rationing and priorities on the 
other. The price of eggs e. g. was regulated without regard to 
the price of hen feed, with the result that hens were slaughtered. 
The price of wheat was fixed without fixing the price of other 
grain substitutes therefor. The price of coal was fixed, but 
not of fuel oil; of cottonseed, but not of cotton, — while a dif- 
ferent body, actuated by different motives, fixed the price of 
cotton hnters. After all, price fixing, control of production 
and consumption, taxation, and government borrowing, all are 
concerned with price, and all affect the adjustment of labor 
and capital, saving and the distribution of wealth. The lower 
the price and profits, for example, the less the inflation re- 
quired, while not only is the source of income taxes reduced, 
but also the need for such taxes. 

As a result of not coordinating price regulation with taxation 
policy, conflicting purposes were allowed to function, loose 
methods were encouraged, and prices were not so carefully fixed, 
nor taxes so carefully applied, as would have been the case had 
the two matters been considered together. This fact is con- 
cretely illustrated by the virtual clash between the " cost-finding " 
principles of the Federal Trade Commission and the rulings of 
the Internal Revenue Department with regard to the determina- 
tion of investment. The lack of coordination between price 
regulation and the control of demand and supply is illustrated 
by the fact that prices were sometimes raised unnecessarily 
when the real need was for priority {e.g, oil) ; and, in the case 
of cement, prices were actually raised to keep plants alive, while 
at the same time the output of the industry was curtailed by a 
reduction in the coal allowance. When the whole price-fixing 
and industrial-control " program " is regarded as it should be, 
that is as a national policy, it becomes apparent that it was 
highly opportunistic. While intimidating some to observe re- 
tail grocery prices and to buy liberty bonds, while compelling 
some to live up to the rationing regulations concerning sugar 
and flour or to sell at prices carefully fixed on the basis of cost, 
the government was appealing to others on the score of patriot- 



PRICE FIXING IN UNITED ST A TES DURING THE WAR 73 

ism and was virtually bribing still others through high profits 
and was facilitating the whole scheme by the dangerous expedi- 
ent of continual inflation. 

4. Conclusion 

It is our conclusion that price fixing is, in war time, a neces- 
sary evil. 

In the first place it is necessary. The chief grounds of 
necessity, some of which did not have much influence if 
any, were as follows : ( i ) To replace competition where 
this force disappears or becomes abnormal. Unified govern- 
ment buying increases the field of monopoly, and conditions of 
ignorance and panic make a reliance upon the forces of demand 
and supply in many cases impracticable; (2) To serve as part 
of a system of control of demand and supply. The use of 
priorities, rationing etc., causes changes in demand and supply 
forces which require an appropriate adjustment in prices; (3) 
Price fixing in the shape of a guaranteed price is necessary in 
some cases to insure the adequate production of needed com- 
modities ; (4) Price fixing may be used to advantage for the 
purpose of stabilizing markets when such markets would other- 
wise take on a " run-away" condition. 

Nevertheless, price fixing, even when necessary in time of 
war, is an evil or at least has its evil side. Any price fixing is 
bad in the sense that some of the advantages of free competi- 
tion are abandoned, the most notable loss being that of the 
"weeding out" process which attends competition. As a re- 
sult, there is no guarantee that the margin of production will be 
economically determined. The adjustments required among 
different industries are also sure to involve some which arc dis- 
criminatory in character. 

The evils of price fixing may, in our opinion, be reduced to 
such a minimum that in wartime the advantages gained thereby 
outweigh the disadvantages. On the whole, it is our opinion 
that such was the case in the United States, but that the balance 
in favor of the price fixing was, on account of the way in which 
it was done, much slighter than it should have been. 

Lewis H. Haney, 

Jacksonville, Florida. 



